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Information Use and Transference among Legally Separated Share Markets—An Experimental Approach

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  • Li Qi
  • Jack Ochs

Abstract

Several countries have adopted legally separated share markets (LSSM), where local firms market separate claims to the same dividend flow to domestic and foreign investors who cannot arbitrage across LSSM. We designed a laboratory experiment to test whether the inside information in one LSSM is reflected in the prices of both markets. We find that insider information does transfer across markets. The extent of this transfer depends upon whether the location of insiders is publicly known, how close prices in the informed market get to the full information equilibrium, and how much the price variance is in this market. We also observe insiders' behavior and performance under different market conditions. Efforts by insiders to manipulate the market increase when their location is unknown to the public. On average such efforts pay off to the whole group of insiders but not to the initiator of these manipulative transactions.

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  • Li Qi & Jack Ochs, 2009. "Information Use and Transference among Legally Separated Share Markets—An Experimental Approach," Southern Economic Journal, John Wiley & Sons, vol. 76(1), pages 99-129, July.
    • Handle: RePEc:wly:soecon:v:76:y:2009:i:1:p:99-129
    DOI: 10.4284/sej.2009.76.1.99
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    Cited by:

    1. Merl, Robert, 2022. "Literature review of experimental asset markets with insiders," Journal of Behavioral and Experimental Finance, Elsevier, vol. 33(C).

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