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When index dissemination goes wrong: How fast can traders add and multiply?

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  • Jayanth R Varma

Abstract

This paper studies an episode of dissemination of wrong stock index values in real time due to a software bug in the Indian Nifty index futures market on the morning of January 18, 2006. The episode provides an opportunity to test various models of cognitive biases and bounded rationality highlighted in behavioural finance. The paper provides strong evidence against cognitive biases like “anchoring and adjustment†(Tversky and Kahneman, 1974) that one might expect under such situations even though the cognitive task involved is quite simple. The futures market tracked the true Nifty index which it could not see while completely ignoring the wrong Nifty index that it could see. However, the paper demonstrates that market efficiency failed in more subtle ways. There is evidence of a partial breakdown of price discovery in the futures markets and a weakening of the bonds linking futures and cash markets. [W.P. No. 2010-08-04]

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  • Jayanth R Varma, 2010. "When index dissemination goes wrong: How fast can traders add and multiply?," Working Papers id:3249, eSocialSciences.
  • Handle: RePEc:ess:wpaper:id:3249 Note: Institutional Papers
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    References listed on IDEAS

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    1. Abreu, Dilip & Brunnermeier, Markus K., 2002. "Synchronization risk and delayed arbitrage," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 341-360.
    2. Fabian Muniesa & Yuval Millo & Michel Callon, 2007. "An introduction to market devices," Post-Print halshs-00177928, HAL.
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    Keywords

    stock index; software; finance; Tversky and Kahneman; discovery; markets;

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