Deflating Bubbles in Experimental Asset Markets: Comparative Statics of Margin Regulations

Margin requirements are being used to regulate the risks of leveraged positions in financial markets. Violated margin requirements trigger margin calls that lead to automated liquidation of open margin positions. Under controlled laboratory conditions we consider the effect of margin trading along with margin calls and automated liquidation on price bubbles. Our results indicate margin trading to reinforce price bubbles and to amend volatility and liquidity. The effect even holds if we allow for short sales. The results indicate that insufficient margin requirements might be an indicator to reinforce price bubbles.