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On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market

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  • Barner, Martin
  • Feri, Francesco
  • Plott, Charles

Abstract

Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option would be known with certainty. The results are the following: (1) Information becomes aggregated in the prices as if fully informative rational expectations operated; and (2) The mechanism through which information gets into the market is captured by a path dependent process that we term "The Fundamental Coordination Principle of Information Transfer in Competitive Markets". The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the "Fundamental Principle."

Suggested Citation

  • Barner, Martin & Feri, Francesco & Plott, Charles, 2004. "On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market," Working Papers 1204, California Institute of Technology, Division of the Humanities and Social Sciences.
  • Handle: RePEc:clt:sswopa:1204
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    Cited by:

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    2. Thomas Stöckl, 2013. "Price efficiency and trading behavior in limit order markets with competing insiders," Working Papers 2013-11, Faculty of Economics and Statistics, Universität Innsbruck.
    3. 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.
    4. 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).
    5. Lawrence Choo & Todd R. Kaplan & Ro’i Zultan, 2019. "Information aggregation in Arrow–Debreu markets: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 22(3), pages 625-652, September.
    6. 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).
    7. Grazzini, J., 2011. "Experimental Based, Agent Based Stock Market," CeNDEF Working Papers 11-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    8. Thomas Stöckl, 2014. "Price efficiency and trading behavior in limit order markets with competing insiders," Experimental Economics, Springer;Economic Science Association, vol. 17(2), pages 314-334, June.
    9. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2007. "Asset bubbles without dividends : an experiment," Papers 07-01, Sonderforschungsbreich 504.
    10. Palan, Stefan & Stöckl, Thomas, 2017. "When chasing the offender hurts the victim: The case of insider legislation," Journal of Financial Markets, Elsevier, vol. 35(C), pages 104-129.
    11. Kleinlercher, Daniel & Stöckl, Thomas, 2021. "Thou shalt not trade—An analysis of the violations of no-trade predictions in experimental asset markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    12. repec:use:tkiwps:2626 is not listed on IDEAS
    13. Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
    14. Bao, Te & Hennequin, Myrna & Hommes, Cars & Massaro, Domenico, 2020. "Coordination on bubbles in large-group asset pricing experiments," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    15. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2011. "On the ingredients for bubble formation: Informed traders and communication," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1831-1851.
    16. Corgnet, Brice & DeSantis, Mark & Porter, David, 2021. "Information aggregation and the cognitive make-up of market participants," European Economic Review, Elsevier, vol. 133(C).
    17. Jakob Grazzini, 2013. "Information dissemination in an experimentally based agent-based stock market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 179-209, April.
    18. Plott, Charles R. & Llewellyn, Morgan, 2015. "Information transfer and aggregation in an uninformed committee: A model for the selection and use of biased expert advice," European Journal of Political Economy, Elsevier, vol. 40(PB), pages 208-223.
    19. M. Middeldorp & S. Rosenkranz, 2008. "Central bank communication and crowding out of private information in an experimental asset market," Working Papers 08-26, Utrecht School of Economics.
    20. Plott, Charles & Roy, Nilanjan & Tong, Baojia, 2013. "Marshall and Walras, disequilibrium trades and the dynamics of equilibration in the continuous double auction market," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 190-205.
    21. Stefan Palan & Thomas Stöckl, 2014. "When chasing the offender hurts the victim: Collateral damage from insider legislation," Working Paper Series, Social and Economic Sciences 2014-03, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.

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    More about this item

    Keywords

    Microstructure; Information; Rational Expectations experiments; Information Aggregation; Belief Formation; Bubbles; Cascades; Mirages;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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