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Informational Price Cascades and Non-aggregation of Asymmetric Information in Experimental Asset Markets

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  • Jason Shachat

    ()
    (Wang Yanan Institute for Studies in Economics, and MOE Key Laboratory in Econometrics, Xiamen University)

  • Anand Srinivasan

    ()
    (Wang Yanan Institute for Studies in Economics, and MOE Key Laboratory in Econometrics, Xiamen University)

Abstract

We report on experimental markets for a contingent claim asset that eight subjects traded for nine periods before the state was revealed. There is an informative binary signal that arrives after each of the first eight trading rounds. In our baseline treatment the realization of the signal is public information, and in another treatment, market participants are randomly sequenced and receive the signal as private information. In the latter case, we observe zero information aggregation and prices lock in on home grown norms, which we call informational price cascades. We test the fragility of the price cascades in two further treatments. First, we break the monopoly on each signal by revealing it to two subjects, and then we increase that number to four. It is only when we inform four participants, or one-half of the market, that cascades fail to form and information starts to aggregate in the market.

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File URL: http://feel.xmu.edu.cn/RePEc/wpaper/Informational_Price_Cascades_and_Non-aggregation_of_Asymmetric_Information_in_Experimental_Asset_Markets.pdf
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Bibliographic Info

Paper provided by Xiamen Unversity, The Wang Yanan Institute for Studies in Economics, Finance and Economics Experimental Laboratory in its series Working Papers with number 1102.

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Length: 62 pages
Date of creation: 14 Apr 2011
Date of revision: 14 Apr 2011
Handle: RePEc:fee:wpaper:1102

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Keywords: Information cascade; information aggregation; experiment; asset market;

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