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On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market

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Author Info
Barner, Martin
Feri, Francesco
Plott, Charles
Abstract

Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option would be known with certainty. The results are the following: (1) Information becomes aggregated in the prices as if fully informative rational expectations operated; and (2) The mechanism through which information gets into the market is captured by a path dependent process that we term "The Fundamental Coordination Principle of Information Transfer in Competitive Markets". The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the "Fundamental Principle."

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Paper provided by California Institute of Technology, Division of the Humanities and Social Sciences in its series Working Papers with number 1204.

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Length: 40 pages
Date of creation: Aug 2004
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Publication status: Published:
Handle: RePEc:clt:sswopa:1204

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Postal: Working Paper Assistant, Division of the Humanities and Social Sciences, 228-77, Caltech, Pasadena CA 91125
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Related research
Keywords: Microstructure; Information; Rational Expectations experiments; Information Aggregation; Belief Formation; Bubbles; Cascades; Mirages;

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  7. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-98, August. [Downloadable!] (restricted)
    Other versions:
  8. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," Journal of Business, University of Chicago Press, vol. 68(4), pages 509-41, October. [Downloadable!] (restricted)
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  12. Noeth, Markus & Camerer, Colin F. & Plott, Charles R. & Webber, Martin, 1999. "Information Aggregation in Experimental Asset Markets: Traps and Misaligned Beliefs," Working Papers 1060, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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  14. Noussair, Charles N & Plott, Charles R & Riezman, Raymond G, 1995. "An Experimental Investigation of the Patterns of International Trade," American Economic Review, American Economic Association, vol. 85(3), pages 462-91, June. [Downloadable!] (restricted)
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  15. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1982. "Asset Valuation in an Experimental Market," Econometrica, Econometric Society, vol. 50(3), pages 537-67, May. [Downloadable!] (restricted)
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  23. Anderson, Christopher M. & Plott, Charles R. & Shimomura, K.-I.Ken-Ichi & Granat, Sander, 2004. "Global instability in experimental general equilibrium: the Scarf example," Journal of Economic Theory, Elsevier, vol. 115(2), pages 209-249, April. [Downloadable!] (restricted)
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  31. Cason, Timothy N, 2000. "The Opportunity for Conspiracy in Asset Markets Organized with Dealer Intermediaries," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(2), pages 385-416.
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