The effect of short-selling of the aggregation of information in an experimental asset market (original) (raw)
Information Aggregation and Manipulation in an Experimental Market
2004
Prediction markets are increasingly being considered as methods for gathering, summarizing and aggregating diffuse information by governments and businesses alike. Critics worry that these markets are susceptible to price manipulation by agents who wish to distort decision making. We study the effect of manipulators on an experimental market. We find that manipulators are unable to distort price accuracy. Subjects without manipulation incentives compensate for the bias in offers from manipulators by setting a different threshold at which they are willing to accept trades. * The authors thank Manuela Abbate for research assistance and an anonymous referee for helpful comments. We gratefully acknowledge the financial support of the International Foundation for Research in Experimental Economics.
The effect of short selling and borrowing on market prices and traders’ behavior
Journal of Economic Dynamics and Control, 2019
This paper studies the influence of allowing borrowing and short selling on market prices and traders' forecasts in an experimental asset market. We verify, although not statistically significantly so, that borrowing tends to increase asset overvaluation and price forecasts, while short selling tends to reduce these measures. We also show that a number of results on beliefs, traders' types, cognitive sophistication, and earnings obtained in earlier experimental studies in which borrowing and short selling are not possible, generalize to markets with borrowing and short sales.
Annals of Finance, 2005
Experiments were conducted on an asset with the structure of an option. The information of any individual is limited, as if only the direction of movement of the option value known for a single period without information of the value from when movement was initiated. However, if all information of all insiders were pooled, the value of the option would be known with certainty. The results are the following: (1) Information becomes aggregated in the prices as if fully informative rational expectations operated; and (2) The mechanism through which information gets into the market is captured by a path dependent process that we term "The Fundamental Coordination Principle of Information Transfer in Competitive Markets". The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the "Fundamental Principle."
Price Manipulation in an Experimental Asset Market
arno.unimaas.nl
We analyze in the laboratory whether an uninformed trader is able to manipulate the price of a financial asset by comparing the results of two experimental treatments. In the benchmark treatment, 12 subjects trade a common value asset that takes either a high or a low value. Only three subjects know the actual value of the asset while the market is open for trading. The manipulation treatment is identical to the benchmark treatment apart from the fact that we introduce a computer program as an additional uninformed trader. This robot buys a fixed number of shares in the beginning of a trading period and sells them again afterwards. Our main result shows that the last contract price is significantly higher in the manipulation treatment if the asset takes a low value and that private information is very well disseminated by both markets if the value of the asset is high. Finally, even though this simple manipulation program loses money on average, it is profitable in some instances.
Price Manipulation in an Experimental Asset Market RM/06/024
arno.unimaas.nl
We analyze in the laboratory whether an uninformed trader is able to manipulate the price of a financial asset. To do so, we compare the results of two different experimental treatments. In the Benchmark Treatment, twelve subjects trade a common value asset that takes either a high or a low value. Information is distributed asymmetrically, only three out of twelve subjects know the actual value of the asset. The Manipulation Treatment is identical to the Benchmark Treatment apart from the fact that we introduce a computer program as an additional trader. This manipulation program buys a fixed number of shares in the beginning of a trading period and sells them afterwards again. Our results show that the last contract price is significantly higher in the Manipulation Treatment if the asset takes a low value and that there are no price differences between the two treatments if the value of the asset is high. Moreover, this simple manipulation program is, at least in some instances, profitable.
The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets
The Journal of Finance, 2006
A series of experiments illustrate that relaxing short-selling constraints lowers prices in experimental asset markets, but does not induce prices to track fundamentals. We argue that prices in experimental asset markets are inf luenced by restrictions on short-selling capacity and limits on the cash available for purchases. Restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner. A simulation model, based on DeLong et al. (1990), generates average price patterns that are similar to the observed data.
Price Formation in a Market with Short Sale Prohibition: An Empirical Investigation
SSRN Electronic Journal, 2000
2 equal to the market maker's conditional expectation of asset value based on trade flow, finding volume not to be increasing in the variance in prices. extended Glosten and Milgrom's model to include three types of short sale constraints. They examined whether market short sale constraints affect the trading propensity, thereby causing asymmetries in the speed of price adjustment to good and bad news. They concluded that a short-sale prohibition reduced the speed of price adjustment to inside information. Easley and O'Hara [1987] used a modified, discrete time Glosten and Milgrom approach to include different trade sizes and information uncertainty. The market maker attempted to determine both the existence and direction of new information. Easley and O'Hara [1992a] focused on the trade process instead of the usual price process, finding that 'event uncertainty' provides an informational role for trading volume gained directly from the properties of the underlying information structure, with time and volume becoming endogenous variables. By opening the possibility of a 'no trade' event to all agents, the model predicts the positive correlation between price observation and trading volume. Easley, Kiefer and O'Hara [1995] and Easley, Kiefer, O'Hara and Paperman [1996] proposed empirical studies based on the Easley and O'Hara [1992a] paper, with the latter study moving to continuous time. Brennan and Subrahmanyam [1995a] found that privately informed investors create significant illiquidity costs for uninformed investors, while Foster and Viswanathan [1995] found a model of speculative trading to be partially consistent with the asymmetric volume-volatility relationship, as evidenced by intraday transaction data for an individual firm during 1988. Price Formation in a Market with a Short-Sale Prohibition: an Empirical Investigation 3
Experimental asset markets with endogenous choice of costly asymmetric information
Experimental Economics, 2011
Asymmetric distribution of information, while omnipresent in real markets, is rarely considered in experimental financial markets. We present results from experiments where subjects endogenously choose between five information levels (four of them costly). We find that (i) uninformed traders earn the highest net returns, while average informed traders always perform worst even when information costs are not considered; (ii) over time traders
Market behavior in the presence of costly, imperfect information: Experimental evidence
Journal of Economic Behavior & Organization, 1997
We investigate the effects of imperfect, private information on prices in an experimental asset market. We compare Bayesian predictions with market prices, examine information dissemination, and consider the value of imperfect information. We find some evidence that market prices are consistent with Bayes' rule. We also find that non-Bayesian prices are more likely to arise as the degree of uncertainty associated with private information increases. Imperfect information is disseminated in our experimental markets and traders perceive that imperfect information has value.
Overweighting of public information in financial markets: A lesson from the lab
Journal of Banking & Finance, 2021
We experimentally study the information aggregation process in a laboratory financial market when a public signal is released. The public disclosure crowds out information demand and reduces price informativeness. The latter effect is primarily caused by the overweighting of public information into prices. We are the first in providing evidence that strategic pricing concerns trigger the overweighting effect and the consequent market overreaction to public disclosures. From an economic policy perspective, we give support that, when deciding their communication strategy, the regulator can mitigate the market overreaction by properly setting the level of information transparency.