Informational Contagion in the Laboratory

62 Pages Posted: 18 Aug 2015

See all articles by Marco Cipriani

Marco Cipriani

Federal Reserve Bank of New York

Antonio Guarino

University College London - Centre for Economic Learning and Social Evolution (ELSE)

Giovanni Guazzarotti

Bank of Italy

Federico Tagliati

University College London

Sven Fischer

University of Newcastle - Economics

Multiple version iconThere are 3 versions of this paper

Date Written: 2015-03-01

Abstract

We study the informational channel of financial contagion in the laboratory. In our experiment, two markets with correlated fundamentals open sequentially. In both markets, subjects receive private information. Subjects in the market opening second also observe the history of trades and prices in the first market. We find that although in both markets private information is only imperfectly aggregated, subjects are able to make correct inferences based on the public information coming from the market that opens first. As a result, we observe financial contagion in the laboratory: Indeed, the correlation between asset prices is very close to that predicted by the theory. Finally, as theory predicts, there is no contagion when asset fundamentals are independent: That is, subjects only react to the history of prices and trades in the first market when it is rational to do so because they convey information.

Keywords: information contagion, laboratory experiment

JEL Classification: C92, G01, G14, G15

Suggested Citation

Cipriani, Marco and Guarino, Antonio and Guazzarotti, Giovanni and Tagliati, Frederico and Fischer, Sven, Informational Contagion in the Laboratory (2015-03-01). FRB of New York Staff Report No. 715. Available at SSRN: https://ssrn.com/abstract=2646038 or http://dx.doi.org/10.2139/ssrn.2646038

Marco Cipriani (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Antonio Guarino

University College London - Centre for Economic Learning and Social Evolution (ELSE) ( email )

Gower Street
London WC1E 6BT
United Kingdom

HOME PAGE: http://www.homepages.ucl.ac.uk/~uctpagu/

Giovanni Guazzarotti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Frederico Tagliati

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Sven Fischer

University of Newcastle - Economics ( email )

Newcastle-upon-Tyne NE1 7RU
United Kingdom

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