Asset Prices and Informed Traders' Abilities: Evidence from Experimental Asset Markets

FRB of Atlanta Working Paper No. 2002-26

47 Pages Posted: 19 Feb 2003  

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business; Federal Reserve Bank of Atlanta

Bryan K. Church

Georgia Institute of Technology - Accounting Area

Ping Zhang

University of Toronto - Rotman School of Management

Date Written: December 2002

Abstract

This study reports the results of fifteen experimental asset markets designed to investigate the effects of forecasts on market prices, traders' abilities to assess asset value, and the link between the two. Across the fifteen markets, the authors investigate alternative forecast-generating processes. In some markets the process produces an unbiased estimate of asset value and in others a biased estimate. The processes generating the biased forecasts, though, are less variable than the process generating the unbiased forecast. The authors find that, in general, period-end asset price reflects private forecasts, regardless of the forecast-generating process. Subsequently, they investigate whether traders' abilities to use forecasts differ across the forecast-generating processes. The authors find that most are able to properly use unbiased forecasts. They refer to them as smart traders. By comparison, a significant proportion is unable to properly use biased forecasts (typically traders' adjustments for bias are insufficient). Linking market outcomes and traders' abilities, the authors find that asset price appears to properly reflect unbiased forecasts as long as the market includes at least two smart informed traders who have sufficient ability to influence market outcomes. To obtain a comparable result in markets with the biased forecast, at least three smart informed traders with sufficient ability to influence market outcomes are necessary.

Keywords: forecast bias, experimental markets, smart traders

JEL Classification: D82, M41, G29

Suggested Citation

Ackert, Lucy F. and Church, Bryan K. and Zhang, Ping, Asset Prices and Informed Traders' Abilities: Evidence from Experimental Asset Markets (December 2002). FRB of Atlanta Working Paper No. 2002-26. Available at SSRN: https://ssrn.com/abstract=367600 or http://dx.doi.org/10.2139/ssrn.367600

Lucy F. Ackert (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Bryan K. Church

Georgia Institute of Technology - Accounting Area ( email )

755 Ferst Drive
Atlanta, GA 30332-0250
United States
404-894-3907 (Phone)
404-894-6030 (Fax)

Ping Zhang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

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