On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market

47 Pages Posted: 26 Jul 2004

See all articles by Martin Barner

Martin Barner

University of Copenhagen - Department of Economics; California Institute of Technology - Division of the Humanities and Social Sciences

Francesco Feri

University of London

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: July 2004

Abstract

Experiments were conducted on an asset with the structure of an option. The asset was structured as though before the opening of each trading day a small group of insiders know whether the value of the underlying security will go up or down but the actual value of the underlying security is known to no one. Each day the insiders are composed of a different group of agents and no agent is an insider more than once. Thus, an individual's private information is at most that the fundamental value of the option has gone up or down once but does not know the value from where the movement was initiated and knows the movement for only one period over the life of the option. This particular construction allowed us to study the full implication of the integration of asymmetrically held information over time. The results are the following: (1) The price of the option is similar to the price that would exist if the implicit price of the underlying security were known with certainty to all agents; and (2) A key element of the information aggregation process is discovered. The process through which information gets into the market is captured by a type of path dependence that we term The Fundamental Coordination Principle of Information Transfer in Competitive Markets. The early contracts tend to be initiated by insiders who tender limit orders. The emergence of bubbles and mirages in the markets are coincident with failures and circumstances that prevent the operation of the fundamental principle.

Suggested Citation

Barner, Martin and Feri, Francesco and Plott, Charles R., On the Microstructure of Price Determination and Information Aggregation with Sequential and Asymmetric Information Arrival in an Experimental Asset Market (July 2004). Available at SSRN: https://ssrn.com/abstract=568502 or http://dx.doi.org/10.2139/ssrn.568502

Martin Barner

University of Copenhagen - Department of Economics

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

California Institute of Technology - Division of the Humanities and Social Sciences

1200 East California Blvd.
Pasadena, CA 91125
United States

Francesco Feri

University of London ( email )

Senate House
Malet Street
London, WC1E 7HU
United Kingdom

Charles R. Plott (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

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