DIFFERENTIATED ASSETS: AN EXPERIMENTAL STUDY ON BUBBLES

Authors

  • KENNETH S. CHAN,

    1. Chan: Department of Economics and Finance, City University of Hong Kong; Lingnan College, Sun Yat-Sen University, China. Phone (852) 3442-2659, Fax (852) 3442-8858, E-mail chanken93@gmail.com
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  • VIVIAN LEI,

    1. Lei: Department of Economics, University of Wisconsin-Milwaukee, Bolton Hall 818, Milwaukee, WI 53211; Department of Economics and Finance, City University of Hong Kong. Phone (414) 229-6494, Fax (414) 229-3860, E-mail vlei@uwm.edu
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  • FILIP VESELY

    1. Vesely: Department of Economics, University of Wisconsin-Milwaukee, Bolton Hall 818, Milwaukee, WI 53211. Phone (414) 229-4910, Fax (414) 229-3860, E-mail vesely@uwm.edu
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    • We are grateful to the Department of Economics and Finance at the City University of Hong Kong for financial and laboratory support. We thank participants at the 2007 North-American Economic Science Association Conference for helpful comments.


Abstract

In this paper, we study if and how having two differentiated assets affects bubble formation. We consider differences in assets' intrinsic characteristics as well as trading regulations that help differentiate two otherwise identical assets. We find that, compared to trading regulations, differences in assets' intrinsic characteristics encourage more arbitrage across assets and thus help reduce mispricing significantly. We also find that short-term speculation does not depend on how assets or markets are being differentiated. As a result, short-term speculation cannot be used to explain why bubbles are smaller when two assets are intrinsically different than when they are not. (JEL C91, F34)

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