Price distortions and public information: theory, experiments and simulations

Alba Ruiz-Buforn, Simone Alfarano and Eva Camacho-Cuena
Authors registered in the RePEc Author Service: Eva Camacho Cuena ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies the effects on the asset price of the introduction of a public signal in the presence of asymmetric private information in a decentralized market. We introduce an artificial market model populated by boundedly rational agents with heterogeneous levels of reasoning: sophisticated and naive traders. The model captures the main impacts of public information analyzed in the laboratory experiments reported by Ruiz-Buforn et al. (2019). Public information, when correct, coordinates market activity, improving price convergence to the fundamentals. By contrast, unwarranted public information pushes prices away from fundamentals. This strong influence of public information on prices is primarily driven by its common knowledge property.

Keywords: Public information; asset markets; asymmetric information (search for similar items in EconPapers)
JEL-codes: C90 D80 D82 G10 (search for similar items in EconPapers)
Date: 2019-04-13
New Economics Papers: this item is included in nep-exp and nep-ict
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