Financial Market in the Laboratory
AbstractThis paper investigates experimentally a market inspired by two separate strands of economic literature. The first strand is that of herd behaviour in non-market situations and the second that of the aggregation of private information in markets. The first suggests that socially undesirable herd behaviour may result when information is private; the second suggests that in a market context the private information may be aggregated efficiently through the price mechanism. The latter literature therefore suggests that socially undesirable behaviour may be eliminated through the market mechanism. We tested this hypothesis experimentally, in a very simple extension of a herd model into a market context, and found that many of the stylised facts of financial markets (i.e. fat tails of the distribution of returns and autoregressive dependence in volatility) can be reproduced in our experimental market.
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Bibliographic InfoPaper provided by EconWPA in its series Experimental with number 0401002.
Date of creation: 13 Jan 2004
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herd behaviour; fat tail volatility clustering.;
Other versions of this item:
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-01-18 (All new papers)
- NEP-CBE-2004-01-18 (Cognitive & Behavioural Economics)
- NEP-EXP-2004-01-18 (Experimental Economics)
- NEP-FIN-2004-01-18 (Finance)
- NEP-FMK-2004-01-18 (Financial Markets)
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