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Do prices in the unmediated call auction reflect insider information? - An experimental analysis

Author

Listed:
  • Tobias Brünner

    (Institut zur Erforschung der wirtschaftlichen Entwicklung, Albert-Ludwigs-Universität)

  • Rene Levinsky

    (Max Planck Institute of Economics, Jena, Germany)

Abstract

The unmediated call auction is a useful trading mechanism to aggregate dispersed information. Its ability to incorporate information of a single informed insider, however, is less well understood. We analyse this question by presenting a simple call auction game where both auction prices and limit prices of uninformed traders re?ect potential insider information. The predictions of the model are tested in the laboratory. While an insider improves the call auction outcomes in terms of increasing trading volume, uninformed traders fail to incorporate the (potential) insider information in their limit prices. We also derive an equilibrium relationship between auction returns and transaction costs similar to the relations that can be found in market microstructure models of continuous markets and which are commonly applied to estimate transaction costs. The experiment provides a good environment to assess the usefulness of this method to estimate transaction costs.

Suggested Citation

  • Tobias Brünner & Rene Levinsky, 2008. "Do prices in the unmediated call auction reflect insider information? - An experimental analysis," Jena Economics Research Papers 2008-090, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2008-090
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    File URL: https://oweb.b67.uni-jena.de/Papers/jerp2008/wp_2008_090.pdf
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    Cited by:

    1. Philipp Hornung & Ulrike Leopold-Wildburger & Roland Mestel & Stefan Palan, 2015. "Insider behavior under different market structures: experimental evidence on trading patterns, manipulation, and profitability," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(2), pages 357-373, June.

    More about this item

    Keywords

    call auction; asymmetric information; experiment; market microstructure;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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