The effect of short-selling of the aggregation of information in an experimental asset market (original) (raw)
Related papers
The Effect of Short¿ Selling on the Aggregation of Information in an Experimental Asset Market
Documentos de trabajo (FEDEA), 2008
Resumen: Utilizando experimentos de laboratorio se demuestra que la liberalización de restricciones de venta de bienes financieros baja el precio del bien, independientemente si el bien es inicialmente sobre o infravalurado. Por tanto, la agregación de información mejora en caso que el bien es sobrevalorado, pero empeora si el bien es infravalorado. Encontramos con respecto a los pagos que no sólo agentes no informados sino tambiién algunos tipos de agentes parcialmente informados sufren de la liberalizaciión del ...
Short-selling constraints as cause for price distortions: An experimental study
Journal of International Money and Finance, 2012
In this paper we explore the influence of the possibility to short stocks and/or borrow money in laboratory markets. A key innovation of our study is that subjects can simultaneously trade two risky assets on two double-auction markets, allowing us to differentiate between assets with relatively high versus low capitalization. Divergence of opinions is created by providing each trader with noisy information on the intrinsic values of both assets. We find that when borrowing money or shorting stocks is restricted prices are systematically distorted. Specifically, stocks with high (low) capitalization are traded at lower (higher) prices than their fundamental value. Lifting the restrictions leads to more efficient prices and more liquidity, thereby also lowering volatility and bid-ask spreads.
Information aggregation in experimental asset markets in the presence of a manipulator
Documentos de trabajo (FEDEA), 2008
We study with the help of a laboratory experiment the conditions under which an uninformed manipulator - a robot trader that unconditionally buys several shares of a common value asset in the beginning of a trading period and unwinds this position later on - is able to induce higher asset prices. We find that the average contract price is significantly higher in the presence of the manipulator if, and only if, the asset takes the lowest possible value and insiders have perfect information about the true value of the asset. It is also evidenced that the robot trader makes trading gains; i.e., independently on whether the informed traders have perfect or partial information, it earns always more than the average trader. Finally, not only uninformed subjects suffer from the presence of the robot trader, but also some of the imperfectly informed insiders have lower payoffs once the robot trader is added as a market participant.
Documentos de trabajo (FEDEA), 2008
We study with the help of a laboratory experiment the conditions under which an uninformed manipulator -a robot trader that unconditionally buys several shares of a common value asset in the beginning of a trading period and unwinds this position later on -is able to induce higher asset prices. We find that the average contract price is significantly higher in the presence of the manipulator if, and only if, the asset takes the lowest possible value and insiders have perfect information about the true value of the asset. It is also evidenced that the robot trader makes trading gains; i.e., independently on whether the informed traders have perfect or partial information, it earns always more than the average trader. Finally, not only uninformed subjects suffer from the presence of the robot trader, but also some of the imperfectly informed insiders have lower payoffs once the robot trader is added as a market participant.
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.
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.