The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets




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    • Haruvy is in the Department of Marketing, University of Texas at Dallas, 2601 North Floyd Rd., Richardson, TX 75083-0688, USA. Noussair is in the Department of Economics, Emory University, 1602 Fishburne Dr., Atlanta, GA 30322-2240, USA. We thank Jason Shachat and two anonymous referees for comments.


A series of experiments illustrate that relaxing short-selling constraints lowers prices in experimental asset markets, but does not induce prices to track fundamentals. We argue that prices in experimental asset markets are influenced by restrictions on short-selling capacity and limits on the cash available for purchases. Restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner. A simulation model, based on DeLong et al. (1990), generates average price patterns that are similar to the observed data.