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

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  • Tobias Brünner

    ()
    (Institut zur Erforschung der wirtschaftlichen Entwicklung, Albert-Ludwigs-Universität)

  • Rene Levinsky

    (Max Planck Institute of Economics, Jena, Germany)

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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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers 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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Keywords: call auction; asymmetric information; experiment; market microstructure;

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