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Digital options and efficiency in experimental asset markets

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  • Palan, Stefan

Abstract

In asset markets, extraordinary price run-ups (bubbles) followed by crashes back to levels closer to fundamental values have been shown to adversely affect the real economy, leading to inefficient resource allocation and underinvestment. Conversely, derivative markets contribute to price discovery and lead to informationally more efficient prices in the market for the underlying asset. We combine these observations and test experimentally whether digital options - a type of derivative that has recently been introduced to a wider audience via online prediction markets - can reduce price bubbles in a laboratory setting. We find that subjects do not use the derivative market to improve their expectations of future asset prices and analyze this result.
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  • Palan, Stefan, 2010. "Digital options and efficiency in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 75(3), pages 506-522, September.
    • Handle: RePEc:eee:jeborg:v:75:y:2010:i:3:p:506-522
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    2. Matthias Weber & John Duffy & Arthur Schram, 2019. "Credit Default Swap Regulation in Experimental Bond Markets," Working Papers on Finance 1905, University of St. Gallen, School of Finance.
    3. Praveen Kujal & Owen Powell, 2017. "Bubbles in Experimental Asset Markets," Working Papers 17-01, Chapman University, Economic Science Institute.
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    6. John Duffy & Jean Paul Rabanal & Olga A. Rud, 2022. "Market experiments with multiple assets: A survey," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 18, pages 213-224, Edward Elgar Publishing.
    7. Matthias Weber & John Duffy & Arthur Schram, 2018. "An Experimental Study of Bond Market Pricing," Journal of Finance, American Finance Association, vol. 73(4), pages 1857-1892, August.
    8. Owen Powell & Natalia Shestakova, 2017. "The robustness of mispricing results in experimental asset markets," Vienna Economics Papers 1702, University of Vienna, Department of Economics.
    9. de Jong, Johan & Sonnemans, Joep & Tuinstra, Jan, 2022. "The effect of futures markets on the stability of commodity prices," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 176-211.
    10. Stefan Palan, 2014. "A Software for Asset Market Experiments," Working Paper Series, Social and Economic Sciences 2014-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    11. Owen Powell & Natalia Shestakova, 2017. "The robustness of mispricing results in experimental asset markets," Vienna Economics Papers vie1702, University of Vienna, Department of Economics.

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