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Trading Complex Assets

Author

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  • Bruce I. Carlin
  • Shimon Kogan

Abstract

We perform an experimental study of complexity to assess its effect on trading behavior, price volatility, liquidity, and trade efficiency. Subjects were asked to deduce the value of a particular asset from information they were given about the composition and price of several portfolios. Following that, subjects traded with each other anonymously in a well-defined, simple bargaining process. Portfolio problems ranged from requiring simple analysis to more complicated computation. Complexity altered subjects' bidding strategies, decreased liquidity, increased price volatility, and decreased trade efficiency. Female subjects were affected more by complexity (e.g., lower trade frequency), although they achieved higher payoffs in the complex treatment. Our analysis suggests that complexity may be a driver of volatility and liquidity in financial markets and provides novel testable empirical predictions.

Suggested Citation

  • Bruce I. Carlin & Shimon Kogan, 2010. "Trading Complex Assets," NBER Working Papers 16187, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16187
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    References listed on IDEAS

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    1. Bernardo, Antonio E & Cornell, Bradford, 1997. "The Valuation of Complex Derivatives by Major Investment Firms: Empirical Evidence," Journal of Finance, American Finance Association, vol. 52(2), pages 785-798, June.
    2. Bruce Ian Carlin & Shaun William Davies & Andrew Miles Iannaccone, 2010. "Competing for Attention in Financial Markets," NBER Working Papers 16085, National Bureau of Economic Research, Inc.
    3. Kalyan Chatterjee & William Samuelson, 1983. "Bargaining under Incomplete Information," Operations Research, INFORMS, vol. 31(5), pages 835-851, October.
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    5. Schotter, Andrew, 1990. "Bad and Good News about the Sealed-Bid Mechanism: Some Experimental Results," American Economic Review, American Economic Association, vol. 80(2), pages 220-226, May.
    6. Radner, Roy & Schotter, Andrew, 1989. "The sealed-bid mechanism: An experimental study," Journal of Economic Theory, Elsevier, vol. 48(1), pages 179-220, June.
    7. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, vol. 91(3), pages 278-287, March.
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    Cited by:

    1. Goldman, Eitan & Strobl, Günter, 2013. "Large shareholder trading and the complexity of corporate investments," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 106-122.
    2. Madura, Jeff & Susnjara, Jurica, 2013. "The appeal of private targets in international acquisitions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 198-222.

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    More about this item

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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