Abstract
We analyze the potential role of a public message as a coordination mechanism between traders in an experimental asset market that exhibits departures from fundamental values. Dividends are the same for all players except for an unknown ex-ante. During the treatment sessions, a message that does not offer new information is sent to all traders at the same predetermined time. We compare deviations from fundamental prices in sessions with and without a message. We find no statistical evidence that a public message without informational content is able to bring prices back to fundamental values.
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Notes
See Reinhart and Rogoff (2009) for a several centuries account of such episodes and their impact across different economies.
The effects of the banking reform of 2010 remain to be quantified.
Federal Reserve Bank of New York President Dudley (2010) argues a central bank should use “the bully pulpit” along with monetary policy and macroprudential tools: “…simply lean against the wind of conventional wisdom by speaking out about the dangers associated with the incipient bubble. The policymaker could point out the assumptions embedded in the rapid rise in asset prices and question the accuracy of the assumptions.”
The speech was broadly about the mission of the central bank in a democratic society. This is the sentence that moved the markets: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” In the same speech Greenspan acknowledged a role for the central bank in monitoring the asset prices: “[…]we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy. “see Greenspan (1996).
Kohn and Sack (2003) analyze the effects of FOMC communications in the 1990s on interest rates. Their study suggests that the substantial impact that has been found is due primarily to informational content.
The model relies on the presence of both rational and bounded rational traders.
Both are available upon request.
The figures for all the other sessions are available upon request.
As Table 5 shows, there was nothing peculiar about session 11: the bidding process after the release of the message started below the expected value of $1.40 and the first price was similar in magnitude to other sessions.
Ben Bernanke’s comments about “green shots” in March of 2009 might have arguably been such a test as the stock market recovered substantially since then.
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Acknowledgments
We are grateful to the editor and referees for their very helpful suggestions. We also benefited from comments from Martin Dufwenberg Price Fishback, Tim Davies and from participants at the 2009 WEAI and 2011 WEAI Pacific Rim conferences. We gratefully acknowledge the financial support from the Graduate College at University of Arizona and from the College of Business and Economics at California State University, East Bay. All errors are ours.
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Stoian, A. Public Messages and Asset Prices. Atl Econ J 42, 441–454 (2014). https://doi.org/10.1007/s11293-014-9431-5
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DOI: https://doi.org/10.1007/s11293-014-9431-5