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Crowding out effect and traders' overreliance on public information in financial markets: a lesson from the lab

Ruiz-Buforn, Alba, Simone Alfarano (), Camacho-Cuena, Eva and Andrea Morone ()
Authors registered in the RePEc Author Service: Eva Camacho Cuena ()

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we study experimentally the information aggregation process in a market as a function of the access to different sources of information, namely an imperfect, public and costless signal into a market where the participants have access to costly and imperfect private information. Our results show that the release of public information provokes a crowding out effect on the traders' information demand while it keeps constant market informativeness, but significantly reduces price informativeness. Traders overrely on public information, which has a significant negative impact on the overall market performance. We detect the emergence of the overrelying phenomenon, despite the absence of an explicit incentive to the subjects to coordinate, demonstrating, therefore, that the adverse effects of releasing public information in a financial market are more relevant than generally assumed, based on the results of previous experiments inspired by simple coordination models. Our results pose new questions when a regulatory institution has to decide the appropriate level of transparency of its communication strategy.

Keywords: Experiments; financial markets; private and public information; overrelying; crowding out (search for similar items in EconPapers)
JEL-codes: C92 D82 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-exp
Date: 2018-09-05
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