On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market

Martin Barner, Francesco Feri and Charles Plott ()

No 1204, Working Papers from California Institute of Technology, Division of the Humanities and Social Sciences

Abstract: Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option would be known with certainty. The results are the following: (1) Information becomes aggregated in the prices as if fully informative rational expectations operated; and (2) The mechanism through which information gets into the market is captured by a path dependent process that we term "The Fundamental Coordination Principle of Information Transfer in Competitive Markets". The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the "Fundamental Principle."

Keywords: Microstructure; Information; Rational Expectations experiments; Information Aggregation; Belief Formation; Bubbles; Cascades; Mirages (search for similar items in EconPapers)
Pages: 40 pages
Date: 2004-08
New Economics Papers: this item is included in nep-exp, nep-fmk and nep-mic
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Journal Article: On the microstructure of price determination and information aggregation with sequential and asymmetric information arrival in an experimental asset market (2005)
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