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Financial Market in the Laboratory

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  • Andrea Morone

    (University of Bari)

Abstract

This 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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File URL: http://128.118.178.162/eps/exp/papers/0401/0401002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Experimental with number 0401002.

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Date of creation: 13 Jan 2004
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Handle: RePEc:wpa:wuwpex:0401002

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Keywords: herd behaviour; fat tail volatility clustering.;

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  1. LeRoy, Stephen F, 1989. "Efficient Capital Markets and Martingales," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1583-1621, December.
  2. Giulia Iori, 1999. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Finance 9905005, EconWPA.
  3. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  4. Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July.
  5. Day, R. & Huang, W., 1988. "Bulls, Bears And Market Sheep," Papers m8822, Southern California - Department of Economics.
  6. Arifovic, Jasmina & Gencay, Ramazan, 2000. "Statistical properties of genetic learning in a model of exchange rate," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 981-1005, June.
  7. Chen, Shu-Heng & Lux, Thomas & Marchesi, Michele, 2001. "Testing for non-linear structure in an artificial financial market," Journal of Economic Behavior & Organization, Elsevier, vol. 46(3), pages 327-342, November.
  8. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
  9. repec:fth:calaec:13-89 is not listed on IDEAS
  10. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
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Cited by:
  1. Annamaria Fiore & Andrea Morone, 2005. "Is playing alone in the darkness sufficient to prevent informational cascades?," Papers on Strategic Interaction 2005-09, Max Planck Institute of Economics, Strategic Interaction Group.
  2. Fiore, Annamaria & Morone, Andrea, 2007. "A Simple Note on Informational Cascades," Economics Discussion Papers 2007-21, Kiel Institute for the World Economy.

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