Abstract
This paper studies the effect of allowing borrowing and short selling on market prices and traders’ forecasts in an experimental asset market. There are four treatments, organized in a 2 × 2 design based on whether or not margin buying is allowed, and whether short selling is permitted or not. We observe that borrowing and short selling do not have significant effects on prices and forecasts due to extensive within-treatment heterogeneity. Beliefs are based on past prices of the current and previous markets, regardless of borrowing or short selling possibilities. Traders who have greater cognitive abilities tend to make more use of short selling and borrowing. A number of relationships regarding traders’ types, cognitive sophistication, and earnings observed in earlier experimental studies in which borrowing and short selling are not possible, generalize to markets with borrowing and short sales.
Original language | English (US) |
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Article number | 103734 |
Journal | Journal of Economic Dynamics and Control |
Volume | 107 |
DOIs | |
State | Published - Oct 2019 |
Keywords
- Bubble
- Experimental asset market
- Margin buying
- Short sales
ASJC Scopus subject areas
- Economics and Econometrics
- Control and Optimization
- Applied Mathematics