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Contagion in sequential financial markets: an experimental analysis

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  • Peeters, Ronald
  • Lopes Moreira Da Veiga, María Helena
  • Vorstaz, Marc

Abstract

Within an experimental financial market, we study how information about the true dividend of an asset, which is available to some traders, is absorbed in the asset’s price when all traders have access to 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 depends positively on the dividend of the other asset. Since there is no aggregate uncertainty in the own market, observed prices in the other market should not affect own prices according to the rational expectations equilibrium. We find that own prices reasonably converge in both treatments towards the rational expectations equilibrium if the dividend of the own asset is high. In contrast, if the dividend of the own asset is low, we find that own prices are substantially higher (and therefore further away from rational expectations equilibrium) when asset prices are correlated. The prior information equilibrium predicts this treatment effect. Hence, a correlated asset structure can potentially obstruct the information transmission from the informed to the uninformed traders.

Suggested Citation

  • Peeters, Ronald & Lopes Moreira Da Veiga, María Helena & Vorstaz, Marc, 2022. "Contagion in sequential financial markets: an experimental analysis," DES - Working Papers. Statistics and Econometrics. WS 31230, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:31230
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    References listed on IDEAS

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    1. 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).
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    5. 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.
    6. 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.
    7. Toni Ahnert & Christoph Bertsch, 2022. "A Wake-Up Call Theory of Contagion [Asymmetric business cycles: theory and time-series evidence]," Review of Finance, European Finance Association, vol. 26(4), pages 829-854.
    8. 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.
    9. repec:cup:judgdm:v:7:y:2012:i:1:p:25-47 is not listed on IDEAS
    10. 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.
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    Cited by:

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    More about this item

    Keywords

    Contagion;

    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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