An Experimental Analysis of Dynamic Informed Trading

Junqian Li (), Yuqing Liu (), Nhan Buu Phan () and Shino Takayama ()
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Junqian Li: School of Economics, Shandong University
Yuqing Liu: School of Economics, University of Queensland, Brisbane, Australia
Nhan Buu Phan: School of Economics, University of Queensland, Brisbane, Australia
Shino Takayama: School of Economics, University of Queensland, Brisbane, Australia

No 665, Discussion Papers Series from University of Queensland, School of Economics

Abstract: In this paper, we study the trading strategies of informed traders in a simulated asset market. There is a risky asset with two possible values, and participants receive private information about the value of the asset. Market maker’s quotes are computationally simulated. We study whether the trading behavior of informed traders—specifically, the frequency of manipulative trading versus honest trading—is influenced by various conditions, including the bid–ask spread, retrading possibilities, and the risk attitude of traders. Our findings suggest that manipulation occurs in both long (e.g., 15 periods) and short (e.g., five periods) trading rounds. Furthermore, there is a significant increase in the number of manipulators when the bid–ask spread is narrow rather than wide. Our results also indicate that risk-seeking participants engage in manipulation more frequently than other participants.

Date: 2023-11
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-gth and nep-mst
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