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An experimental analysis of contagion in financial markets

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  • Peeters, Ronald
  • Vorstaz, Marc

Abstract

In an experimental market, we study how information about the dividend of an asset, which is available to some traders, is absorbed in the asset’s price when all traders also have access to the prices of another different asset. We consider two treatments: in one, the dividends of the two assets are independent; in the other, the dividend of the own asset correlates positively with the dividend of the other asset. Since there is no aggregate uncertainty in the own market, the other dividend should not affect own prices according to the rational expectations equilibrium. Consistent with a prior information perspective, we find that (a) own prices are increasing in the other dividend if and only if dividends are correlated, and (b) correlated dividends can worsen information dissemination when the own dividend is low, and the other dividend is high. These findings imply that linkages between markets, both via fundamentals and via observability of market prices, can cause financial contagion even if there are corrective market forces at play (superior private information in the own market).

Suggested Citation

  • Peeters, Ronald & Vorstaz, Marc, 2022. "An experimental analysis of contagion in financial markets," DES - Working Papers. Statistics and Econometrics. WS 31230, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:31230
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    References listed on IDEAS

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    1. Brice Corgnet & Cary Deck & Mark Desantis & Kyle Hampton & Erik O Kimbrough, 2019. "Reconsidering Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers halshs-02146611, HAL.
    2. Brice Corgnet & Cary Deck & Mark Desantis & David Porter, 2018. "Information (non)aggregation in markets with costly signal acquisition," Post-Print hal-02312202, HAL.
    3. Ahnert, Toni & Bertsch, Christoph, 2013. "A wake-up call: information contagion and strategic uncertainty," Working Paper Series 282, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.
    4. 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.
    5. Toni Ahnert & Christoph Bertsch, 2022. "A Wake-Up Call Theory of Contagion [Asymmetric business cycles: theory and time-series evidence]," Review of Finance, European Finance Association, vol. 26(4), pages 829-854.
    6. Corgnet, Brice & DeSantis, Mark & Porter, David, 2020. "The distribution of information and the price efficiency of markets," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    7. Camerer, Colin & Weigelt, Keith, 1991. "Information Mirages in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 64(4), pages 463-493, October.
    8. Lucy F. Ackert & Stefano Mazzotta & Li Qi, 2011. "An Experimental Investigation of Asset Pricing in Segmented Markets," Southern Economic Journal, John Wiley & Sons, vol. 77(3), pages 585-598, January.
    9. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
    10. repec:cup:judgdm:v:7:y:2012:i:1:p:25-47 is not listed on IDEAS
    11. Lucy F. Ackert & Stefano Mazzotta & Li Qi, 2011. "An Experimental Investigation of Asset Pricing in Segmented Markets," Southern Economic Journal, John Wiley & Sons, vol. 77(3), pages 585-598, January.
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    1. repec:grz:wpsses:2021-04 is not listed on IDEAS
    2. 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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    More about this item

    Keywords

    Experimental asset markets;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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