IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v171y2025ics0165188924002252.html
   My bibliography  Save this article

An experimental analysis of contagion in financial markets

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165188924002252
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jedc.2024.105033?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Brice Corgnet & Cary Deck & Mark Desantis & Kyle Hampton & Erik O Kimbrough, 2019. "Reconsidering Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers halshs-02146611, HAL.
    2. repec:hal:journl:hal-02312202 is not listed on IDEAS
    3. Ahnert, Toni & Bertsch, Christoph, 2013. "A wake-up call: information contagion and strategic uncertainty," Working Paper Series 282, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.
    4. Corgnet, Brice & Deck, Cary & DeSantis, Mark & Porter, David, 2018. "Information (non)aggregation in markets with costly signal acquisition," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 286-320.
    5. Edward T. Cokely & Mirta Galesic & Eric Schulz & Saima Ghazal & Rocio Garcia-Retamero, 2012. "Measuring risk literacy: The Berlin Numeracy Test," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(1), pages 25-47, January.
    6. Lucy F. Ackert & Stefano Mazzotta & Li Qi, 2011. "An Experimental Investigation of Asset Pricing in Segmented Markets," Southern Economic Journal, Southern Economic Association, vol. 77(3), pages 585-598, January.
    7. Corgnet, Brice & DeSantis, Mark & Porter, David, 2020. "The distribution of information and the price efficiency of markets," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    8. Camerer, Colin & Weigelt, Keith, 1991. "Information Mirages in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 64(4), pages 463-493, October.
    9. Lucy F. Ackert & Stefano Mazzotta & Li Qi, 2011. "An Experimental Investigation of Asset Pricing in Segmented Markets," Southern Economic Journal, John Wiley & Sons, vol. 77(3), pages 585-598, January.
    10. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
    11. repec:cup:judgdm:v:7:y:2012:i:1:p:25-47 is not listed on IDEAS
    12. Lucy F. Ackert & Stefano Mazzotta & Li Qi, 2011. "An Experimental Investigation of Asset Pricing in Segmented Markets," Southern Economic Journal, John Wiley & Sons, vol. 77(3), pages 585-598, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:grz:wpsses:2021-04 is not listed on IDEAS
    2. Merl, Robert, 2022. "Literature review of experimental asset markets with insiders," Journal of Behavioral and Experimental Finance, Elsevier, vol. 33(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Corgnet, Brice & DeSantis, Mark & Porter, David, 2021. "Information aggregation and the cognitive make-up of market participants," European Economic Review, Elsevier, vol. 133(C).
    2. Brice Corgnet & Cary Deck & Mark DeSantis & Kyle Hampton & Erik O. Kimbrough, 2023. "When Do Security Markets Aggregate Dispersed Information?," Management Science, INFORMS, vol. 69(6), pages 3697-3729, June.
    3. Andrea Albertazzi & Friederike Mengel & Ronald Peeters, 2021. "Benchmarking information aggregation in experimental markets," Economic Inquiry, Western Economic Association International, vol. 59(4), pages 1500-1516, October.
    4. Brice Corgnet & Mark DeSantis & David Porter, 2020. "Information Aggregation and the Cognitive Make-up of Traders," Working Papers 20-18, Chapman University, Economic Science Institute.
    5. Brice Corgnet & Cary Deck & Mark DeSantis & David Porter, 2022. "Forecasting Skills in Experimental Markets: Illusion or Reality?," Management Science, INFORMS, vol. 68(7), pages 5216-5232, July.
    6. Lucy F. Ackert & Brian D. Kluger & Li Qi & Lijia Wei, 2022. "An experimental examination of the flow of irrelevant information across markets," Southern Economic Journal, John Wiley & Sons, vol. 88(3), pages 1119-1148, January.
    7. Merl, Robert, 2022. "Literature review of experimental asset markets with insiders," Journal of Behavioral and Experimental Finance, Elsevier, vol. 33(C).
    8. Ahrash Dianat & Christoph Siemroth, 2021. "Improving decisions with market information: an experiment on corporate prediction markets," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 143-176, March.
    9. repec:grz:wpsses:2021-04 is not listed on IDEAS
    10. Ruiz-Buforn, Alba & Camacho-Cuena, Eva & Morone, Andrea & Alfarano, Simone, 2021. "Overweighting of public information in financial markets: A lesson from the lab," Journal of Banking & Finance, Elsevier, vol. 133(C).
    11. Arturo Macias, 2022. "Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1418-1440, November.
    12. Suren Vardanyan, 2016. "Contagion in Experimental Financial Markets," CERGE-EI Working Papers wp580, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    13. Abduraimova, Kumushoy, 2022. "Contagion and tail risk in complex financial networks," Journal of Banking & Finance, Elsevier, vol. 143(C).
    14. Brice Corgnet & Cary Deck & Mark Desantis & Kyle Hampton & Erik O Kimbrough, 2019. "Reconsidering Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers halshs-02146611, HAL.
    15. Graciela L. Kaminsky, 2008. "Crises and Sudden Stops: Evidence from International Bond and Syndicated-Loan Markets," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 26, pages 107-130, December.
    16. Cipollini, A. & Kapetanios, G., 2009. "Forecasting financial crises and contagion in Asia using dynamic factor analysis," Journal of Empirical Finance, Elsevier, vol. 16(2), pages 188-200, March.
    17. Rachel Male, 2010. "Developing Country Business Cycles: Characterising the Cycle," Working Papers 663, Queen Mary University of London, School of Economics and Finance.
    18. Nuzzo, Simone & Morone, Andrea, 2017. "Asset markets in the lab: A literature review," Journal of Behavioral and Experimental Finance, Elsevier, vol. 13(C), pages 42-50.
    19. Mohammad Karimi & Marcel‐Cristian Voia, 2019. "Empirics of currency crises: A duration analysis approach," Review of Financial Economics, John Wiley & Sons, vol. 37(3), pages 428-449, July.
    20. Barbone, Luca & Forni, Lorenzo, 1997. "Are markets learning? : behavior in the secondary market for Brady bonds," Policy Research Working Paper Series 1734, The World Bank.
    21. Begüm Yurteri Kösedağlı & A. Özlem Önder, 2021. "Determinants of financial stress in emerging market economies: Are spatial effects important?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4653-4669, July.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:171:y:2025:i:c:s0165188924002252. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jedc .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.