Informational Price Cascades and Non-Aggregation of Asymmetric Information in Experimental Asset Markets

Journal of Behavioral Finance Web Link: https://doi.org/10.1080/15427560.2022.2081970

32 Pages Posted: 19 Apr 2011 Last revised: 26 Jul 2022

See all articles by Jason Shachat

Jason Shachat

Durham University

Anand Srinivasan

National University of Singapore - Department of Finance; National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN)

Date Written: June 22, 2022

Abstract

We report on experimental markets which generate an abject failure of the aggregation of asymmetric information. While realized prices have zero correlation with fundamental values, surprisingly, these are not highly volatile. The non-aggregation of information manifests as prices which lock into home grown norms that we call informational price cascades. Our results are in stark contrast to previous experiments testing fully revealing rational expectations equilibrium under asymmetric information and others examining social learning in asset markets when there is a rational market maker. Our experiments incorporate the asset and information structures from the latter into the decentralized private information setting and double auction trading mechanism of the former. Information only starts to aggregate when either each private signal is revealed to half of the traders, or all private signals are simultaneously released early in the asset’s issue.

Keywords: Information cascade, information aggregation, experiment, asset market

JEL Classification: C92, D82, G12

Suggested Citation

Shachat, Jason and Srinivasan, Anand, Informational Price Cascades and Non-Aggregation of Asymmetric Information in Experimental Asset Markets (June 22, 2022). Journal of Behavioral Finance Web Link: https://doi.org/10.1080/15427560.2022.2081970, Available at SSRN: https://ssrn.com/abstract=1813383 or http://dx.doi.org/10.2139/ssrn.1813383

Jason Shachat (Contact Author)

Durham University ( email )

Durham University Business School
Mill Hill Lane
Durham, Fujian DH1 3LB
United Kingdom

Anand Srinivasan

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

National University of Singapore (NUS) - Sustainable & Green Finance Institute (SGFIN) ( email )

Singapore

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