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Price Manipulation in an Experimental Asset Market

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  • Veiga, Helena
  • Vorsatz, Marc

    (METEOR)

Abstract

We analyze in the laboratory whether an uninformed trader is able to manipulate the price of a financial asset. To do so, we compare the results of two different experimental treatments. In the Benchmark Treatment, twelve subjects trade a common value asset that takes either a high or a low value. Information is distributed asymmetrically, only three outof twelve subjects know the actual value of the asset. The Manipulation Treatment is identical to the Benchmark Treatment apart from the fact that we introduce a computer program as an additional trader. This manipulation program buys a fixed number of shares in the beginning of a trading period and sells them afterwards again. Our results show that the last contract price is significantly higher in the Manipulation Treatment if the asset takes a low value and that there are no price differences between the two treatments if the value of the asset is high. Moreover, this simple manipulation program is, at least in some instances, profitable.

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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 024.

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Date of creation: 2006
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Handle: RePEc:unm:umamet:2006024

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Keywords: financial economics and financial management ;

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References

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  1. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Working paper 259, Regulation2point0.
  2. Forsythe, Robert & Palfrey, Thomas R. & Plott, Charles R., . "Asset Valuation in an Experimental Market," Working Papers 299, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Bagnoli, M. & Lipman, B., 1989. "Stock Price Manipulation Through Takeover Bids," Papers 90-09, Michigan - Center for Research on Economic & Social Theory.
  4. repec:reg:rpubli:259 is not listed on IDEAS
  5. Sunder, Shyam, 1992. "Market for Information: Experimental Evidence," Econometrica, Econometric Society, vol. 60(3), pages 667-95, May.
  6. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  7. Chakraborty, Archishman & Yilmaz, Bilge, 2004. "Informed manipulation," Journal of Economic Theory, Elsevier, vol. 114(1), pages 132-152, January.
  8. Archishman Chakraborty & Bilge Yilmaz, 2008. "Microstructure Bluffing with Nested Information," American Economic Review, American Economic Association, vol. 98(2), pages 280-84, May.
  9. Camerer, Colin & Weigelt, Keith, 1991. "Information Mirages in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 64(4), pages 463-93, October.
  10. Kumar, Praveen & Seppi, Duane J, 1992. " Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-502, September.
  11. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  12. Robin Hanson & Ryan Oprea, 2009. "A Manipulator Can Aid Prediction Market Accuracy," Economica, London School of Economics and Political Science, vol. 76(302), pages 304-314, 04.
  13. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 133-164.
  14. Hanson, Robin & Oprea, Ryan & Porter, David, 2006. "Information aggregation and manipulation in an experimental market," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 449-459, August.
  15. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-98, August.
  16. Benabou, Roland & Laroque, Guy, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 921-58, August.
  17. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 317-55, July.
  18. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  19. Marco Ottaviani & Peter Norman Sørensen, 2007. "Outcome Manipulation in Corporate Prediction Markets," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 554-563, 04-05.
  20. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
  21. Forsythe, Robert & Lundholm, Russell, 1990. "Information Aggregation in an Experimental Market," Econometrica, Econometric Society, vol. 58(2), pages 309-47, March.
  22. Bossaerts, Peter & Plott, Charles, 2002. "The CAPM in thin experimental financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1093-1112, July.
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Citations

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Cited by:
  1. Helena Veiga & Marc Vorsatz, 2008. "Aggregation and Dissemination of Information in Experimental Asset Markets in the Presence of a Manipulator," Working Papers 2008-29, FEDEA.
  2. Marc Vorsatz & Helena Veiga, 2008. "The Effect of Short–Selling on the Aggregation of Information in an Experimental Asset Market," Working Papers 2008-26, FEDEA.
  3. Powell, O.R., 2010. "Essays on experimental bubble markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4219264, Tilburg University.

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