Asymmetric information, imitative behaviour and communication: price formation in an experimental asset market

Abstract

The paper describes experimental results from a simulated stock market with manipulation of asymmetric information and communication, including conditions intended to promote imitative behaviour and rumour. Price discovery was inefficient when the presence of insiders was disguised, compared to a homogeneous expectations baseline. When the presence of insiders was revealed observed prices became efficient with respect to bad news but not with respect to good news, possibly suggesting loss-averse behaviour. With free communication there was a decrease in both efficiency and price volatility—insider information was masked by noise. Price formation under these conditions was similar to baseline, but with weak evidence of speculative pricing. It is conjectured that other factors than informational noise may be necessary determinants of herd behaviour, but further work is indicated.experimental markets, limitation, rumour, asymmetric information,

Insider behavior under different market structures: experimental evidence on trading patterns, manipulation, and profitability

“…Yet almost all studies have in common that the subjects who obtain this privileged information are being determined randomly (e.g. Brandouy et al 2003;Nöth and Weber 1996;Schnitzlein 2002). Even when experimental subjects can decide for or against the use of inside information (e.g.…”

“…This may lead to imitative behavior by the non-insiders who will place orders with the same prices (cp. Brandouy et al 2003). Given that a strategy of withholding information prevents the revelation of the insider status, it may be better for insiders to reap profits gradually (cp.…”