Trading Complex Assets

Bruce I. Carlin and Shimon Kogan

No 16187, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We perform an experimental study of complexity to assess its effect on trading behavior, price volatility, liquidity, and trade efficiency. Subjects were asked to deduce the value of a particular asset from information they were given about the composition and price of several portfolios. Following that, subjects traded with each other anonymously in a well-defined, simple bargaining process. Portfolio problems ranged from requiring simple analysis to more complicated computation. Complexity altered subjects' bidding strategies, decreased liquidity, increased price volatility, and decreased trade efficiency. Female subjects were affected more by complexity (e.g., lower trade frequency), although they achieved higher payoffs in the complex treatment. Our analysis suggests that complexity may be a driver of volatility and liquidity in financial markets and provides novel testable empirical predictions.

JEL-codes: C92 G12 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-exp and nep-mst
Note: AP CF
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Citations: View citations in EconPapers (2)

Published as “Trading Complex Assets” (with Shimon Kogan and Richard Lowery). Journal of Finance 68: 1937-1960, 2013.

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