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An Experimental Study of Bond Market Pricing

Author

Listed:
  • Matthias Weber

    (Bank of Lithuania, and Vilnius University, Lithuania)

  • John Duffy

    (University of California, Irvine, United States)

  • Arthur Schram

    (University of Amsterdam, the Netherlands)

Abstract

An important feature of bond markets is the relationship between initial public offering prices and the probability of the issuer defaulting. First, this probability affects the bond prices. Second, IPO prices determine the default probability. Though market equilibrium has been shown to predict well for other assets, it is a priori unclear whether markets will yield competitive prices when such interaction with the default probability occurs. We develop a flexible bond market model that is easily implemented in the laboratory and examine how subjects price bonds. We find that subjects learn to price bonds well after only a few repetitions.

Suggested Citation

  • Matthias Weber & John Duffy & Arthur Schram, 2016. "An Experimental Study of Bond Market Pricing," Tinbergen Institute Discussion Papers 16-059/I, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20160059
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    References listed on IDEAS

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    More about this item

    Keywords

    bond markets; experimental finance; experimental markets; asset pricing; learning;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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