When Do Security Markets Aggregate Dispersed Information?

Abstract

In a seminal work, Plott and Sunder (1988) offer support for the rational expectations hypothesis and report evidence that markets with certain features aggregate dispersed information. However, their results are based on only a few observations and our attempt to replicate the key findings of that study with an appropriately powered experiment largely fails. The resulting post study probability that market performance is better described by rational expectations than the prior information (Walrasian) model under the conditions specified by Plott and Sunder (1988) is very low. As a result of our failure to replicate, we investigate an alternate set of market features that combines aspects of the original experimental design. For these markets we do find robust evidence of information aggregation in support of the rational expectations model. In total, our results indicate that information aggregation in asset markets is fragile and should only be expected in limited circumstances.

Keywords: Aggregation, Efficient Markets, Rational Expectations, Experiments, Replication