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Bubbles and Information: An Experiment

  • Matthias Sutter

    ()

    (Department of Public Finance, University of Innsbruck, A-6020 Innsbruck, Austria; and Department of Economics, University of Gothenburg, S-405 30 Gothenburg, Sweden)

  • Jürgen Huber

    ()

    (Department of Banking and Finance, University of Innsbruck, A-6020 Innsbruck, Austria)

  • Michael Kirchler

    ()

    (Department of Banking and Finance, University of Innsbruck, A-6020 Innsbruck, Austria; and Center for Finance, University of Gothenburg, S-405 30 Gothenburg, Sweden)

A symmetric distribution of information, although omnipresent in real markets, is rarely considered in experimental economics. We study whether information about imminent future dividends can abate bubbles in experimental asset markets. We find that markets with asymmetrically informed traders have significantly smaller bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices--implying higher market efficiency--when some traders know more than others about future dividends. This suggests that bubbles are abated when traders know that a subset of them have an edge (in information) over others. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.

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File URL: http://dx.doi.org/10.1287/mnsc.1110.1365
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 58 (2012)
Issue (Month): 2 (February)
Pages: 384-393

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Handle: RePEc:inm:ormnsc:v:58:y:2012:i:2:p:384-393
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