Risk-Taking and Tail Events Across Trading Institutions

Brice Corgnet, Camille Cornand and Nobuyuki Hanaki

No 2117, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Etienne (GATE Lyon St-Etienne), Université de Lyon

Abstract: We study the reaction of investors to tail events across trading institutions. We conduct experiments in which investors bid on a financial asset that delivers a small positive reward in more than 99% of the cases and a large loss otherwise. The baseline treatment uses a repeated BDM mechanism whereas the market treatment replaces the uniform draw of the BDM mechanism by a uniform draw over the bids of the other participants. Our design is such that bids should not differ across treatments in normal times while allowing for potential differences to emerge after tail events have occurred. We find that markets tend to exacerbate the reaction of investors to tail losses and we attribute this effect to emotions.

Keywords: Tail events; trading institutions; experimental finance; emotions and risk (search for similar items in EconPapers)
JEL-codes: C91 C92 D91 G41 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-exp and nep-rmg
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Working Paper: Risk-Taking and Tail Events Across Trading Institutions (2021)
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