Do prices in the unmediated call auction reflect insider information? - An experimental analysis
AbstractThe 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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Bibliographic InfoPaper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2008-090.
Date of creation: 08 Dec 2008
Date of revision:
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; Insider Trading
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-21 (All new papers)
- NEP-CTA-2008-12-21 (Contract Theory & Applications)
- NEP-EXP-2008-12-21 (Experimental Economics)
- NEP-MST-2008-12-21 (Market Microstructure)
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