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Centralized vs decentralized markets in the laboratory: The role of connectivity

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  • Alfarano, Simone
  • Banal-Estanol, Albert
  • Camacho-Cuena, Eva
  • Iori, Giulia
  • Kapar, Burcu

Abstract

This paper compares the performance of centralized and decentralized markets experimentally. We constrain trading exchanges to happen on an exogenously predetermined network, representing the trading relationships in markets with differing levels of connectivity. Our experimental results show that, despite having lower trading volumes, decentralized markets are not necessarily less efficient. Although information can propagate quicker through highly connected markets, we show that higher connectivity also induces informed traders to trade faster and exploit further their information advantages before the information becomes fully incorporated into prices. This not only reduces market efficiency, but it also increases wealth inequality. We show that, in more connected markets, informed traders trade not only relatively quicker, but also more, in the right direction, despite not doing it at better prices.

Suggested Citation

  • Alfarano, Simone & Banal-Estanol, Albert & Camacho-Cuena, Eva & Iori, Giulia & Kapar, Burcu, 2020. "Centralized vs decentralized markets in the laboratory: The role of connectivity," MPRA Paper 99129, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:99129
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    File URL: https://mpra.ub.uni-muenchen.de/99129/1/MPRA_paper_99129.pdf
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    References listed on IDEAS

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    Cited by:

    1. Ruiz-Buforn, Alba & Alfarano, Simone & Camacho-Cuena, Eva & Morone, Andrea, 2020. "Single vs. multiple disclosures in an experimental asset market with information acquisition," MPRA Paper 101035, University Library of Munich, Germany.

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    More about this item

    Keywords

    Experiments; financial markets; diffusion of information; decentralized trading.;
    All these keywords.

    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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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