The role of public and private information in a laboratory financial market

Simone Alfarano, Andrea Morone and Eva Camacho Cuena ()

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: The main advantages of a laboratory financial market with respect to field data are: (i) it allows us a perfect monitoring of the available information to each subject at any moment in time, and (ii) it gives us the possibility of recording subjects' trading activity in the market. In our experimental design the information distribution is endogenous, since the subjects can buy costly private information. Inspired by the debate on the role of rating agencies in the recent financial crisis, additional to the private information we introduce an imperfect public signal. The study of the interplay between public and private information constitutes our contribution to the experimental literature on laboratory financial markets. In particular, in this paper we study the perturbation created by the introduction of a public signal on the information acquisition process and on the price efficiency in transmitting information. We conclude that the public signal might drive the market price if private information is not of good quality, leaving the financial market in “the hands" of the institution which releases the public information.

Keywords: experiments; financial markets; private and public information; rating agencies (search for similar items in EconPapers)
JEL-codes: C92 D82 G14 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2011-02
New Economics Papers: this item is included in nep-cta and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:ivi:wpasad:2011-06

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