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The Speed of Information Revelation and Eventual Price Quality in Markets with Insiders: Comparing Two Theories

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  • Peter Bossaerts
  • Cary Frydman
  • John Ledyard

Abstract

Two theoretical literatures, one using Bayesian Nash equilibrium (BNE), and the other using noisy rational expectations equilibrium (NREE), both provide a foundation for understanding how private information is impounded into asset prices, yet some of their predictions are conflicting. Here, we compare for the first time, the two theories using data from carefully controlled laboratory asset markets. In the dynamics, we find strong evidence for BNE theory, although final prices support predictions of the NREE theory. Finally, we document that price volatility increases when information is being impounded in prices.

Suggested Citation

  • Peter Bossaerts & Cary Frydman & John Ledyard, 2014. "The Speed of Information Revelation and Eventual Price Quality in Markets with Insiders: Comparing Two Theories," Review of Finance, European Finance Association, vol. 18(1), pages 1-22.
    • Handle: RePEc:oup:revfin:v:18:y:2014:i:1:p:1-22.
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    File URL: http://hdl.handle.net/10.1093/rof/rfs049
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    Cited by:

    1. Merl, Robert & Stöckl, Thomas & Palan, Stefan, 2023. "Insider trading regulation and shorting constraints. Evaluating the joint effects of two market interventions," Journal of Banking & Finance, Elsevier, vol. 154(C).
    2. Halim, Edward & Riyanto, Yohanes E., 2020. "Asset markets with insider trading disclosure rule and reselling constraint: An experimental analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    3. Brice Corgnet & Cary Deck & Mark DeSantis & David Porter, 2022. "Forecasting Skills in Experimental Markets: Illusion or Reality?," Management Science, INFORMS, vol. 68(7), pages 5216-5232, July.
    4. Edward Halim & Yohanes E. Riyanto & Nilanjan Roy, 2019. "Costly Information Acquisition, Social Networks, and Asset Prices: Experimental Evidence," Journal of Finance, American Finance Association, vol. 74(4), pages 1975-2010, August.
    5. Palan, Stefan & Stöckl, Thomas, 2017. "When chasing the offender hurts the victim: The case of insider legislation," Journal of Financial Markets, Elsevier, vol. 35(C), pages 104-129.
    6. repec:grz:wpsses:2021-04 is not listed on IDEAS
    7. Elena Asparouhova & Peter Bossaerts, 2017. "Experiments on Percolation of Information in Dark Markets," Economic Journal, Royal Economic Society, vol. 127(605), pages 518-544.
    8. Brice Corgnet & Cary Deck & Mark DeSantis & Kyle Hampton & Erik O. Kimbrough, 2023. "When Do Security Markets Aggregate Dispersed Information?," Management Science, INFORMS, vol. 69(6), pages 3697-3729, June.
    9. Corgnet, Brice & Deck, Cary & DeSantis, Mark & Porter, David, 2018. "Information (non)aggregation in markets with costly signal acquisition," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 286-320.
    10. Bossaerts, Peter & Suzuki, Shinsuke & O’Doherty, John P., 2019. "Perception of intentionality in investor attitudes towards financial risks," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 189-197.
    11. Simone Alfarano & Albert Banal-Estañol & Eva Camacho & Giulia Iori & Burcu Kapar & Rohit Rahi, 2024. "Centralized vs Decentralized Markets: The Role of Connectivity," Working Papers 1420, Barcelona School of Economics.
    12. repec:grz:wpsses:2021-03 is not listed on IDEAS
    13. Frederik Bossaerts & Nitin Yadav & Peter Bossaerts & Chad Nash & Torquil Todd & Torsten Rudolf & Rowena Hutchins & Anne-Louise Ponsonby & Karl Mattingly, 2022. "Price Formation in Field Prediction Markets: the Wisdom in the Crowd," Papers 2209.08778, arXiv.org.
    14. Cary Frydman & Ian Krajbich, 2022. "Using Response Times to Infer Others’ Private Information: An Application to Information Cascades," Management Science, INFORMS, vol. 68(4), pages 2970-2986, April.
    15. Rocco Caferra & Simone Nuzzo & Andrea Morone, 2023. "“Less is more” or “more is better”? The effect of asymmetric information distribution on market efficiency and wealth inequality," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(2), pages 233-250, April.
    16. Stirnkorb, Sebastian, 2024. "Transaction cost unbundling and investors’ reliance on investment research: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 112(C).
    17. Alba Ruiz-Buforn & Simone Alfarano & Eva Camacho-Cuena & Andrea Morone, 2022. "Single vs. multiple disclosures in an experimental asset market with information acquisition," The European Journal of Finance, Taylor & Francis Journals, vol. 28(13-15), pages 1513-1539, October.
    18. Ackert, Lucy F. & Church, Bryan K. & Zhang, Ping, 2018. "Informed traders’ performance and the information environment: Evidence from experimental asset markets," Accounting, Organizations and Society, Elsevier, vol. 70(C), pages 1-15.
    19. Bossaerts, Frederik & Yadav, Nitin & Bossaerts, Peter & Nash, Chad & Todd, Torquil & Rudolf, Torsten & Hutchins, Rowena & Ponsonby, Anne-Louise & Mattingly, Karl, 2024. "Price formation in field prediction markets: The wisdom in the crowd," Journal of Financial Markets, Elsevier, vol. 68(C).
    20. Arturo Macias, 2022. "Capital structure irrelevance in the laboratory: an experiment with complete and asymmetric information," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1418-1440, November.
    21. Merl, Robert, 2022. "Literature review of experimental asset markets with insiders," Journal of Behavioral and Experimental Finance, Elsevier, vol. 33(C).

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