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Experimentation in Financial Markets

Author

Listed:
  • Massimo Massa

    (INSEAD and CEPR, 77305 Fontainebleau Cedex, France)

  • Andrei Simonov

    (Finance Department, Eli Broad Graduate School of Management, Michigan State University, East Lansing, Michigan 48824)

Abstract

In this paper, we use a unique data set on the Italian interdealer bond market to empirically estimate the process of strategic experimentation. The results show how the information generated in the process of interdealer trading affects the incentive to experiment. Upon receipt of an order, dealers deliberately engage in trade with other dealers either to exploit the information contained in the order they receive or, if they are uncertain about its quality, to assess it by actively experimenting with other dealers. We therefore identify "hiding" and "experimenting" as main types of dealer strategies.

Suggested Citation

  • Massimo Massa & Andrei Simonov, 2009. "Experimentation in Financial Markets," Management Science, INFORMS, vol. 55(8), pages 1377-1390, August.
    • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:8:p:1377-1390
    DOI: 10.1287/mnsc.1090.1030
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    References listed on IDEAS

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