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Trading Complex Assets

Author

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  • Bruce I. Carlin
  • Shimon Kogan

Abstract

We perform an experimental study of complexity to assess its effect on trading behavior, price volatility, liquidity, and trade efficiency. Subjects were asked to deduce the value of a particular asset from information they were given about the composition and price of several portfolios. Following that, subjects traded with each other anonymously in a well-defined, simple bargaining process. Portfolio problems ranged from requiring simple analysis to more complicated computation. Complexity altered subjects' bidding strategies, decreased liquidity, increased price volatility, and decreased trade efficiency. Female subjects were affected more by complexity (e.g., lower trade frequency), although they achieved higher payoffs in the complex treatment. Our analysis suggests that complexity may be a driver of volatility and liquidity in financial markets and provides novel testable empirical predictions.

Suggested Citation

  • Bruce I. Carlin & Shimon Kogan, 2010. "Trading Complex Assets," NBER Working Papers 16187, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16187
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    File URL: http://www.nber.org/papers/w16187.pdf
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    References listed on IDEAS

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    1. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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    Cited by:

    1. Madura, Jeff & Susnjara, Jurica, 2013. "The appeal of private targets in international acquisitions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 198-222.
    2. Goldman, Eitan & Strobl, G√ľnter, 2013. "Large shareholder trading and the complexity of corporate investments," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 106-122.

    More about this item

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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