Information Ambiguity, Market Institutions and Asset Prices: Experimental Evidence

84 Pages Posted: 20 Apr 2021 Last revised: 2 Oct 2021

See all articles by Te Bao

Te Bao

Nanyang Technological University (NTU) - Division of Economics

John Duffy

University of California, Irvine; University of California, Irvine

Jiahua Zhu

Ma Yinchu School of Economics

Date Written: October 2, 2021

Abstract

We explore how information ambiguity and traders’ attitudes toward ambiguity affect expectations and asset prices under three different market institutions. Specifically, we test the prediction of Epstein and Schneider (2008) that information ambiguity will lead market prices to overreact to bad news and to underreact to good news. We find that such an asymmetric reaction exists and is strongest in individual prediction markets. It occurs to a lesser extent in single price call markets. It is weakest of all in double auction markets, where buyers’ asymmetric reaction to good/bad news is cancelled out by the opposite asymmetric reaction of sellers.

Keywords: Ambiguity Aversion, Information ambiguity, Asset Bubbles, Experimental Finance, Signal Extraction

JEL Classification: C91, C92, D82, G12, G40

Suggested Citation

Bao, Te and Duffy, John and Zhu, Jiahua, Information Ambiguity, Market Institutions and Asset Prices: Experimental Evidence (October 2, 2021). Available at SSRN: https://ssrn.com/abstract=3829724 or http://dx.doi.org/10.2139/ssrn.3829724

Te Bao (Contact Author)

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

John Duffy

University of California, Irvine ( email )

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

University of California, Irvine ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Jiahua Zhu

Ma Yinchu School of Economics ( email )

92, Weijin Road
Nankai District
Tianjin, Tianjin 300072
China

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