An experimental analysis of contagion in financial markets

Ronald Peeters and Marc Vorstaz
Authors registered in the RePEc Author Service: Marc Vorsatz and Helena Veiga

DES - Working Papers. Statistics and Econometrics. WS from Universidad Carlos III de Madrid. Departamento de Estadística

Abstract: In an experimental market, we study how information about the dividend of an asset, which is available to some traders, is absorbed in the asset’s price when all traders also have access to the prices of another different asset. We consider two treatments: in one, the dividends of the two assets are independent; in the other, the dividend of the own asset correlates positively with the dividend of the other asset. Since there is no aggregate uncertainty in the own market, the other dividend should not affect own prices according to the rational expectations equilibrium. Consistent with a prior information perspective, we find that (a) own prices are increasing in the other dividend if and only if dividends are correlated, and (b) correlated dividends can worsen information dissemination when the own dividend is low, and the other dividend is high. These findings imply that linkages between markets, both via fundamentals and via observability of market prices, can cause financial contagion even if there are corrective market forces at play (superior private information in the own market).

Keywords: Experimental; asset; markets; Financial; contagion; Information; dissemination; Prior; information; equilibrium; Rational; expectations; equilibrium; Social; learning (search for similar items in EconPapers)
JEL-codes: C92 D82 G12 (search for similar items in EconPapers)
Date: 2022-10-04
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: An experimental analysis of contagion in financial markets (2025)
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