An Experimental Study of Bond Market Pricing

105 Pages Posted: 9 Aug 2016 Last revised: 13 Nov 2017

Matthias Weber

University of St. Gallen - School of Finance; Vilnius University

John Duffy

University of California, Irvine

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

Date Written: November 10, 2017

Abstract

An important feature of bond markets is the relationship between the IPO price and the probability that the issuer defaults. On the one hand, the default probability affects the IPO price. On the other hand, IPO prices affect the default probability. It is a priori unclear whether agents can competitively price such assets and our paper is the first to explore this question. We do so using laboratory experiments. We develop two flexible bond market models that are easily implemented in the laboratory. We find that subjects learn to price the bonds well after only a few repetitions.

Keywords: experimental finance, asset pricing, bond markets, real effects of financial markets, experimental markets

JEL Classification: C92, C90, G12, D47

Suggested Citation

Weber, Matthias and Duffy, John and Schram, Arthur J. H. C., An Experimental Study of Bond Market Pricing (November 10, 2017). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2818424 or http://dx.doi.org/10.2139/ssrn.2818424

Matthias Weber (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Vilnius University ( email )

Sauletekio ave. 11, Vilnius
Vilnius
Lithuania

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 18
CREED
Amsterdam 1018 WB
Netherlands
+31 (0)20 525 4293 (Phone)

HOME PAGE: http://www.fee.uva.nl/creed/PEOPLE/Arthurs.htm

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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