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On the microstructure of price determination and information aggregation with sequential and asymmetric information arrival in an experimental asset market

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  • Martin Barner
  • Francesco Feri
  • Charles R. Plott

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    Abstract

    Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option would be known with certainty. The results are the following: (1) Information becomes aggregated in the prices as if fully informative rational expectations operated; and (2) The mechanism through which information gets into the market is captured by a path dependent process that we term ‘‘The Fundamental Coordination Principle of Information Transfer in Competitive Markets’’. The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the ‘‘Fundamental Principle.’‘ Copyright Springer-Verlag Berlin Heidelberg 2005

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    Bibliographic Info

    Article provided by Springer in its journal Annals of Finance.

    Volume (Year): 1 (2005)
    Issue (Month): 1 (01)
    Pages: 73-107

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    Handle: RePEc:kap:annfin:v:1:y:2005:i:1:p:73-107

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    Web page: http://www.springerlink.com/link.asp?id=112370

    Related research

    Keywords: Microstructure; Information; Rational expectations experiments; Information aggregation; Belief formation; Bubbles; Cascades; Mirages; D4; G10; C92; D44; D82;

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    Cited by:
    1. Plott, Charles & Roy, Nilanjan & Tong, Baojia, 2013. "Marshall and Walras, disequilibrium trades and the dynamics of equilibration in the continuous double auction market," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 190-205.
    2. Sandri, Serena & Schade, Christian & Musshoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs’ and non-entrepreneurs’ disinvestment choices," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 59518, Humboldt University Berlin, Department of Agricultural Economics.
    3. Jakob Grazzini, 2013. "Information dissemination in an experimentally based agent-based stock market," Journal of Economic Interaction and Coordination, Springer, vol. 8(1), pages 179-209, April.
    4. M. Middeldorp & S. Rosenkranz, 2008. "Central bank communication and crowding out of private information in an experimental asset market," Working Papers 08-26, Utrecht School of Economics.
    5. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2007. "Asset Bubbles without Dividends - An Experiment," Sonderforschungsbereich 504 Publications 07-01, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    6. Thomas Stöckl, 2014. "Price efficiency and trading behavior in limit order markets with competing insiders," Experimental Economics, Springer, vol. 17(2), pages 314-334, June.
    7. Thomas Stoeckl, 2013. "Price efficiency and trading behavior in limit order markets with competing insiders," Working Papers 2013-11, Faculty of Economics and Statistics, University of Innsbruck.

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