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Margin Trading Bans in Experimental Asset Markets

Author

Listed:
  • Sascha Füllbrunn

    (Department of Economics, Radboud University Nijmegen)

  • Tibor Neugebauer

    (Luxembourg School of Finance, Faculty of Law, Economics and Finance, University of Luxembourg)

Abstract
In financial markets, professional traders leverage their trades because it allows to trade larger positions with less margin. Violating margin requirements, however, triggers a margin call and open positions are automatically covered until requirements are met again. What impact does margin trading have on the price process and on liquidity in financial asset markets? Since empirical evidence is mixed, we consider this question using experimental asset markets. Starting from an empirically relevant situation where margin purchasing and short selling is permitted, we ban margin purchases and/or short sales using a 2x2 factorial design to a allow for a comparative static analysis. Our results indicate that a ban on margin purchases fosters efficient pricing by narrowing price deviations from fundamental value accompanied with lower volatility and a smaller bid-ask-spread. A ban on short sales, however, tends to distort efficient pricing by widening price deviations accompanied with higher volatility and a large spread.

Suggested Citation

  • Sascha Füllbrunn & Tibor Neugebauer, 2012. "Margin Trading Bans in Experimental Asset Markets," Jena Economics Research Papers 2012-058, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2012-058
    as

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    File URL: https://oweb.b67.uni-jena.de/Papers/jerp2012/wp_2012_058.pdf
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    References listed on IDEAS

    as
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    Cited by:

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    2. Owen Powell & Natalia Shestakova, 2017. "Experimental asset markets: behavior and bubbles," Chapters, in: Morris Altman (ed.), Handbook of Behavioural Economics and Smart Decision-Making, chapter 21, pages 375-391, Edward Elgar Publishing.

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    More about this item

    Keywords

    Leverage; Asset Market; Price Bubble; Experimental Finance;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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