69 Pages Posted: 19 Nov 2011 Last revised: 30 Apr 2012
Date Written: April 22, 2012
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: 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