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

62 Pages Posted: 19 Apr 2011

See all articles by Jason Shachat

Jason Shachat

Durham University

Anand Srinivasan

CAFRAL, Reserve Bank of India; National University of Singapore - Department of Finance

Date Written: April 17, 2011

Abstract

We report on experimental markets for a contingent claim asset that eight subjects traded for nine periods before the state was revealed. There is an informative binary signal that arrives after each of the first eight trading rounds. In our baseline treatment the realization of the signal is public information, and in another treatment, market participants are randomly sequenced and receive the signal as private information. In the latter case, we observe zero information aggregation and prices lock in on home grown norms, which we call informational price cascades. We test the fragility of the price cascades in two further treatments. First, we break the monopoly on each signal by revealing it to two subjects, and then we increase that number to four. It is only when we inform four participants, or one-half of the market, that cascades fail to form and information starts to aggregate in the market.

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 (April 17, 2011). 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

CAFRAL, Reserve Bank of India ( email )

C-8, 8th Floor, Reserve Bank of India
Bandra-Kurla Complex, Bandra (East)
Mumbai, Maharashtra 400051
India

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

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