Transaction Costs and Informational Cascades in Financial Markets: Theory and Experimental Evidence

Marco Cipriani and Antonio Guarino

No 8, WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London

Abstract: We study the effect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We analyze a financial market à la Glosten and Milgrom, in which informed and uninformed traders trade in sequence with a market maker. Traders have to pay a cost in order to trade. We show that, eventually, all informed traders decide not to trade, independently of their private information, i.e., an informational cascade occurs. We replicated our financial market in the laboratory. We found that, in the experiment, informational cascades occur when the theory suggests they should. Nevertheless, the ability of the price to aggregate private information is not significantly affected.

JEL-codes: C92 D8 G14 (search for similar items in EconPapers)
Date: 2006-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.worldeconomyandfinance.org/working_pape ... per_PDFs/WEF0008.pdf (application/pdf)

Related works:
Working Paper: Transaction costs and informational cascades in financial markets: Theory and experimental evidence (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wef:wpaper:0008

Access Statistics for this paper

More papers in WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London Contact information at EDIRC.
Bibliographic data for series maintained by Tim Byne ( this e-mail address is bad, please contact ).