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Do prices in the unmediated call auction reflect insider information? - An experimental analysis

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Author Info
Tobias Brünner () (Institut zur Erforschung der wirtschaftlichen Entwicklung, Albert-Ludwigs-Universität)
Rene Levinsky (Max Planck Institute of Economics, Jena, Germany)

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Abstract

The unmediated call auction is a useful trading mechanism to aggregate dispersed information. Its ability to incorporate information of a single informed insider, however, is less well understood. We analyse this question by presenting a simple call auction game where both auction prices and limit prices of uninformed traders re?ect potential insider information. The predictions of the model are tested in the laboratory. While an insider improves the call auction outcomes in terms of increasing trading volume, uninformed traders fail to incorporate the (potential) insider information in their limit prices. We also derive an equilibrium relationship between auction returns and transaction costs similar to the relations that can be found in market microstructure models of continuous markets and which are commonly applied to estimate transaction costs. The experiment provides a good environment to assess the usefulness of this method to estimate transaction costs.

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Publisher Info
Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers in Economics with number 2008-090.

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Date of creation: 08 Dec 2008
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Handle: RePEc:jrp:jrpwrp:2008-090

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Related research
Keywords: call auction; asymmetric information; experiment; market microstructure;

Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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