Do Insiders Contribute to Market Efficiency? Informational Efficiency and Liquidity of Experimental Call Markets with and without Insiders
Klaus Heilmann and
No 11, Discussion Papers from University of Bamberg, Chair of Finance
This paper reports the results of 13 experimental asset markets with 195 subjects that explore the effects of insider behavior on the price formation process and market liquidity. The experimental call markets use a more realistic design than related studies. We introduce infinitely-lived assets instead of periodical liquidation (so-called 'reset' markets) and provide full market transparency to the investors with an open orderbook. Our main findings are that insider trading does not improve informational efficiency at all but depresses market liquidity of the assets significantly. At a first glance, the observed spread widening as an impact of insider behavior leads to the conclusion that our call markets react 'as if' all subjects behave rationally like dealers in a market making environment. At a second glance, a first look into the individual data shows that only a smaller group of investors act as 'endogenous' market makers in the call market regime.
Keywords: Market Microstructure; Experimental Asset Markets; Insider Behavior; Market Efficiency; Call Markets; Behavioral Finance (search for similar items in EconPapers)
JEL-codes: D44 G12 G14 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamfin:11
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