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An experimental analysis of contagion in financial markets

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  • Peeters, Ronald
  • Veiga, Helena
  • Vorsatz, Marc

Abstract

In an experimental market, we study how information about the dividend of an asset, which is available to some traders, is absorbed in the asset's price when all traders also have access to the prices of another different asset. We consider two treatments: in one, the dividends of the two assets are independent; in the other, the dividend of the own asset correlates positively with the dividend of the other asset. Since there is no aggregate uncertainty in the own market, the other dividend should not affect own prices according to the rational expectations equilibrium. Consistent with a prior information perspective, we find that (a) own prices are increasing in the other dividend if and only if dividends are correlated, and (b) correlated dividends can worsen information dissemination when the own dividend is low, and the other dividend is high. These findings imply that linkages between markets, both via fundamentals and via observability of market prices, can cause financial contagion even if there are corrective market forces at play (superior private information in the own market).

Suggested Citation

  • Peeters, Ronald & Veiga, Helena & Vorsatz, Marc, 2025. "An experimental analysis of contagion in financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 171(C).
  • Handle: RePEc:eee:dyncon:v:171:y:2025:i:c:s0165188924002252
    DOI: 10.1016/j.jedc.2024.105033
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    More about this item

    Keywords

    Experimental asset markets; Financial contagion; Information dissemination; Prior information equilibrium; Rational expectations equilibrium; Social learning;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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