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Trading Complex Assets

69 Pages Posted: 19 Nov 2011 Last revised: 30 Apr 2012

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management

Shimon Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship

Richard Lowery

University of Texas-Austin

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Date Written: April 22, 2012

Abstract

We perform an experimental study to assess the effect of complexity on asset trading. We find that higher complexity leads to increased price volatility, lower liquidity, and decreased trade efficiency especially when repeated bargaining takes place. However, the channel through which complexity acts is not simply due to the added noise induced by estimation error. Rather, complexity alters the bidding strategies used by traders, making them more reticent to trade, even when we control for estimation error across treatments. As such, it appears that adverse selection plays an important role in explaining the trading abnormalities caused by complexity.

Suggested Citation

Carlin, Bruce I. and Kogan, Shimon and Lowery, Richard, Trading Complex Assets (April 22, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1961671 or http://dx.doi.org/10.2139/ssrn.1961671

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Shimon Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel

Richard Lowery (Contact Author)

University of Texas-Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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