Transaction Costs and Informational Cascades in Financial Markets: Theory and Experimental Evidence
We study the effect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We analyze a financial market à la Glosten and Milgrom, in which informed and uninformed traders trade in sequence with a market maker. Traders have to pay a cost in order to trade. We show that, eventually, all informed traders decide not to trade, independently of their private information, i.e., an informational cascade occurs. We replicated our financial market in the laboratory. We found that, in the experiment, informational cascades occur when the theory suggests they should. Nevertheless, the ability of the price to aggregate private information is not significantly affected.
|Date of creation:||Mar 2006|
|Contact details of provider:|| Postal: Malet St, London WC1E 7HX|
Web page: http://www.worldeconomyandfinance.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Marco Cipriani & Antonio Guarino, 2005.
"Herd Behavior in a Laboratory Financial Market,"
American Economic Review,
American Economic Association, vol. 95(5), pages 1427-1443, December.
- Glosten, Lawrence R. & Milgrom, Paul R., 1985.
"Bid, ask and transaction prices in a specialist market with heterogeneously informed traders,"
Journal of Financial Economics,
Elsevier, vol. 14(1), pages 71-100, March.
- Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hirshleifer, David & Teoh, Siew Hong, 2001.
"Herd Behavior and Cascading in Capital Markets: A Review and Synthesis,"
5186, University Library of Munich, Germany.
- David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
- Ian Domowitz & Jack Glen & Ananth Madhavan, 2000.
"Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time,"
William Davidson Institute Working Papers Series
322, William Davidson Institute at the University of Michigan.
- Domowitz, Ian & Glen, Jack & Madhavan, Ananth, 2001. "Liquidity, Volatility and Equity Trading Costs across Countries and over Time," International Finance, Wiley Blackwell, vol. 4(2), pages 221-255, Summer.
- Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521824019, December.
- Karl F Habermeier & Andrei A Kirilenko, 2001. "Securities Transaction Taxes and Financial Markets," IMF Working Papers 01/51, .
- Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
- Avery, Christopher & Zemsky, Peter, 1998. "Multidimensional Uncertainty and Herd Behavior in Financial Markets," American Economic Review, American Economic Association, vol. 88(4), pages 724-748, September.
- Chamley,Christophe P., 2004. "Rational Herds," Cambridge Books, Cambridge University Press, number 9780521530927, December.
When requesting a correction, please mention this item's handle: RePEc:wef:wpaper:0008. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tim Byne)
If references are entirely missing, you can add them using this form.