This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Transaction Costs and Informational Cascades in Financial Markets: Theory and Experimental Evidence

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Marco Cipriani (George Washington University)
Antonio Guarino (University College London)

Additional information is available for the following registered author(s):

Abstract

We study the effect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We analyze a financial market à la Glosten and Milgrom, in which informed and uninformed traders trade in sequence with a market maker. Traders have to pay a cost in order to trade. We show that, eventually, all informed traders decide not to trade, independently of their private information, i.e., an informational cascade occurs. We replicated our financial market in the laboratory. We found that, in the experiment, informational cascades occur when the theory suggests they should. Nevertheless, the ability of the price to aggregate private information is not significantly affected.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.worldeconomyandfinance.org/working_papers_publications/working_paper_PDFs/WEF0008.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by ESRC World Economy and Finance Research Programme, Birkbeck, University of London in its series WEF Working Papers with number 0008.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:wef:wpaper:0008

Contact details of provider:
Postal: 7-15 Greese St., London W1P 2LL
Phone: 44171-631-6428
Fax: 44171-631-6416
Web page: http://www.worldeconomyandfinance.org
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Tim Byne).

Related research
Keywords:

Other versions of this item:

Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, Blackwell Publishing Ltd, vol. 9(1), pages 25-66. [Downloadable!] (restricted)
    Other versions:
  2. Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-48, September. [Downloadable!] (restricted)
  3. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April. [Downloadable!] (restricted)
  4. Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 2001. "Liquidity, Volatility and Equity Trading Costs across Countries and over Time," International Finance, Blackwell Publishing, vol. 4(2), pages 221-55, Summer. [Downloadable!] (restricted)
    Other versions:
  5. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March. [Downloadable!] (restricted)
    Other versions:
  6. Marco Cipriani & Antonio Guarino, 2005. "Herd Behavior in a Laboratory Financial Market," Experimental 0502002, EconWPA. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Richard Morris & Ludger Schuknecht, 2007. "Structural balances and revenue windfalls - the role of asset prices revisited," Working Paper Series 737, European Central Bank. [Downloadable!]
  2. Jukka Jalava & Ilja Kristian Kavonius, 2007. "Durable goods and their effect on household saving rations in the euro area," Working Paper Series 755, European Central Bank. [Downloadable!]
  3. Dieter Gerdesmeier & Francesco Paolo Mongelli & Barbara Roffia, 2007. "The Eurosystem, the US Federal Reserve and the Bank of Japan - similarities and differences," Working Paper Series 742, European Central Bank. [Downloadable!]
    Other versions:
  4. Simone Manganelli & Guido Wolswijk, 2007. "Market discipline, financial integration and fiscal rules - what drives spreads in the euro area government bond market?," Working Paper Series 745, European Central Bank. [Downloadable!]
  5. Julian von Landesberger, 2007. "Sectoral money demand models for the euro area based on a common set of determinants," Working Paper Series 741, European Central Bank. [Downloadable!]
  6. Barbara Roffia & Andrea Zaghini, 2007. "Excess money growth and inflation dynamics," Working Paper Series 749, European Central Bank. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? RePEc and its associated services are free for contributors and users, and do not accept any advertising.

This page was last updated on 2009-12-5.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.