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Information Aggregation with Heterogeneous Traders

Cary Deck, Tae In Jun, Laura Razzolini () and Tavoy Reid
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Cary Deck: Department of Economics, Finance and Legal Studies, University of Alabama and Economic Science Institute, Chapman University
Tae In Jun: Department of Economics, Finance and Legal Studies, University of Alabama
Tavoy Reid: Department of Economics, Finance and Legal Studies, University of Alabama

Working Papers from Chapman University, Economic Science Institute

Abstract: The efficient market hypothesis predicts that asset prices reflect all available information. A seminal experiment reported that contingent claim markets could yield market outcomes consistent with information aggregation when traders hold heterogeneous state-contingent values. However, a recent experiment found the rational expectation model outperformed the prior information and maxi-min models in contingent claim markets when traders hold homogeneous values despite the no trade equilibrium in that setting. But that same study failed to replicate the original result calling into question when, if ever, prices reliably reflect the aggregate information of traders with heterogeneous values. In this paper, we show contingent claim markets can robustly yield prices consistent with the efficient market hypothesis when traders hold heterogeneous values in certain circumstances. The key distinction between our environment and that of the previous studies is that we consider trader values that are correlated and not too dissimilar.

Keywords: Information Aggregation; Rational Expectations; Laboratory Experiments (search for similar items in EconPapers)
JEL-codes: C9 D8 G1 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-exp, nep-mst and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:22-13

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