IDEAS home Printed from https://ideas.repec.org/p/wai/econwp/26-05.html

How does AI affect price discovery and liquidity in asset market experiments?

Author

Listed:

Abstract

This paper investigates the causal impact of artificial intelligence (AI) advice on price discovery in a controlled asset-market experiment. Using a call market setting in which the asset's value follows a stochastic geometric random walk, we compare a baseline "No AI" condition against two treatments: "Good AI" (advice aligned with long-term fundamentals) and "Bad AI" (myopic advice anchored to current buyout prices). Our results show that access to AI advice significantly reduces mispricing relative to the baseline. In particular, Good AI market prices started low, then converged and closely followed the fundamentals in the second half of the market. Interestingly, we find no meaningful difference in aggregate mispricing between the Good and Bad AI treatments. Analysis of trader behavior reveals that while over half of the participants follow AI recommendations, a significant portion actively filters out erroneous advice, particularly in the Bad AI treatment. This selective adherence explains why market prices remain resilient to poor advice.

Suggested Citation

  • Carol Luengo & Steven Tucker & Yilong Xu & Frank Scrimgeour, 2026. "How does AI affect price discovery and liquidity in asset market experiments?," Working Papers in Economics 26/05, University of Waikato.
    • Handle: RePEc:wai:econwp:26/05
    as

    Download full text from publisher

    File URL: https://repec.its.waikato.ac.nz/wai/econwp/2605.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wai:econwp:26/05. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Geua Boe-Gibson (email available below). General contact details of provider: https://edirc.repec.org/data/dewaknz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.