Informational Contagion in the Laboratory

75 Pages Posted: 20 Oct 2016

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: April 28, 2016

Abstract

We study the informational channel of financial contagion under laboratory conditions. In our experiment, two markets with correlated fundamentals open sequentially and in both of them 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. We thus observe financial contagion under laboratory conditions: the correlation between asset prices is very close to that predicted by the theory. Moreover, as the theory predicts, there is no contagion when asset fundamentals are independent: in other words, 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: informational 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 (April 28, 2016). Bank of Italy Temi di Discussione (Working Paper) No. 1063. Available at SSRN: https://ssrn.com/abstract=2856392 or http://dx.doi.org/10.2139/ssrn.2856392

Marco Cipriani

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 (Contact Author)

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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