Bubbles and Information: An Experiment

Abstract

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Bubbles and Information in Continuous Double Auction and Call Market: An Experiment

“…The results suggest that the effects of informational asymmetry on bubbles differ between CDAs and CMs. Specifically, informational asymmetry can contribute to the abatement of bubbles under CDAs as in Sutter et al (2012), while it can contribute to promoting bubbles under CMs. JEL classification: C91, G11…”

“…A key feature of the experimental design of Sutter et al (2012) we would like to notice is that information about the realized prices and the limit orders of the other traders within the current period is available to all traders through the order book.…”

“…8 The effects of informational asymmetry on bubbles were investigated, based on the experimental design of Smith et al (1988), in several studies other than Sutter et al (2012). Similar to Sutter et al (2012), Markstädter et al (2014) show that the informational asymmetry drives market prices toward the FV. On the other hand, several experimental studies find that the presence of private information does not reduce bubbles.…”

“…These studies are comprehensively surveyed in Markstädter et al (2014) and Morone and Nuzzo (2016). 9 In the trading interface used by Sutter et al (2012), "traders were informed about their endowment in cash and stocks, the future dividends (if applicable), the current period's trades, and the open order books for bids and asks. The prices of trades were also shown in a graphical chart".…”

“…10 In addition, informed traders may directly exploit their informational advantage by accepting limit orders against which they possibly arbitrage. These informed and uninformed traders' strategic actions through the order book would make them more aware of the FV, and might lead to price convergence toward the FV and reduce mispricing, as discussed in Sutter et al (2012).…”