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The role of public and private information in a laboratory financial market

  • Simone Alfarano

    ()

    (Dpto. de Economía)

  • Andrea Morone

    ()

    (Dipartimento di Economia)

  • Eva Camacho

    ()

    (Dpt. Economia)

The main advantages of a laboratory financial market with respect to field data are: (i) it allows us a perfect monitoring of the available information to each subject at any moment in time, and (ii) it gives us the possibility of recording subjects' trading activity in the market. In our experimental design the information distribution is endogenous, since the subjects can buy costly private information. Inspired by the debate on the role of rating agencies in the recent financial crisis, additional to the private information we introduce an imperfect public signal. The study of the interplay between public and private information constitutes our contribution to the experimental literature on laboratory financial markets. In particular, in this paper we study the perturbation created by the introduction of a public signal on the information acquisition process and on the price efficiency in transmitting information. We conclude that the public signal might drive the market price if private information is not of good quality, leaving the financial market in “the hands" of the institution which releases the public information.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2011-06.pdf
File Function: Fisrt version / Primera version, 2011
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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2011-06.

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Length: 44 pages
Date of creation: Feb 2011
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2011-06
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