Publication: Contagion in sequential financial markets: an experimental analysis
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2022-10-04
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Abstract
Within an experimental financial market, we study how information about the true dividend of an asset, which is available to some traders, is absorbed in the asset’s price when all traders have access to prices of another different asset. We consider two treatments: in one, the dividends of the two assets are independent; in the other, the dividend of the own asset depends positively on the dividend of the other asset. Since there is no aggregate uncertainty in the own market, observed prices in the other market should not affect own prices according to the rational expectations equilibrium. We find that own prices reasonably converge in both treatments towards the rational expectations equilibrium if the dividend of the own asset is high. In contrast, if the dividend of the own asset is low, we find that own prices are substantially higher (and therefore further away from rational expectations equilibrium) when asset prices are correlated. The prior information equilibrium predicts this treatment effect. Hence, a correlated asset structure can potentially obstruct the information transmission from the informed to the uninformed traders.
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Contagion, Experimental markets, Information aggregation, Prior information equilibrium, Rrational expectations equilibrium