Cash Inflows and Bubbles in Asset Markets with Constant Fundamental Values
11 Pages Posted: 10 May 2016
Date Written: July 2016
Previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals follow a time trajectory that is constant over time. This contrasts with other research indicating that greater cash levels increase prices when fundamental values are decreasing over time. We report a new experiment in which we show that greater initial cash levels are indeed associated with higher prices when fundamental values are constant over time. Thus, high cash levels will lead to bubbles, if the cash is introduced before the market opens. Our results reconcile the two previous sets of findings.
JEL Classification: C90, D03, G02, G12
Suggested Citation: Suggested Citation