Bubbles and Information: An Experiment

Bubbles and Information: An Experiment

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Article ID: iaor2012821
Volume: 58
Issue: 2
Start Page Number: 384
End Page Number: 393
Publication Date: Feb 2012
Journal: Management Science
Authors: , ,
Keywords: experiment, economics
Abstract:

A symmetric distribution of information, although omnipresent in real markets, is rarely considered in experimental economics. We study whether information about imminent future dividends can abate bubbles in experimental asset markets. We find that markets with asymmetrically informed traders have significantly smaller bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices–implying higher market efficiency–when some traders know more than others about future dividends. This suggests that bubbles are abated when traders know that a subset of them have an edge (in information) over others.

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