Overweighting of public information in financial markets: A lesson from the lab

Alba Ruiz-Buforn, Eva Camacho-Cuena, Andrea Morone and Simone Alfarano

Journal of Banking & Finance, 2021, vol. 133, issue C

Abstract: We study the information aggregation process in a laboratory financial market where traders have access to costly private and free public imperfect information. The public disclosure provokes (i) a crowding-out effect on traders’ information demand, (ii) a market overreaction to the public signal, and (iii) a deterioration in price informativeness. We show that the reduction in price informativeness is a direct consequence of the overweighting of public information when aggregated in prices. Moreover, we provide experimental evidence for the theoretical conjecture that the overweighting effect and the subsequent market overreaction to public disclosures are directly related to traders’ second- (or higher) order beliefs. From an economic policy perspective, we provide support that when deciding on a communication strategy, regulatory institutions can smooth the market overreaction by properly setting the level of transparency of their disclosures.

Keywords: Experiment; Prediction markets; Public information; Overweighting; Crowding-out (search for similar items in EconPapers)
JEL-codes: C92 D82 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Overweighting of public information in financial markets: A lesson from the lab (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:133:y:2021:i:c:s0378426621002508

DOI: 10.1016/j.jbankfin.2021.106298

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