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on Contract Theory and Applications |
| By: | Jason Shachat; Anand Srinivasan |
| Abstract: | We report on experimental markets for a contingent claim asset that eight subjects traded for nine periods before the state was revealed. There is an informative binary signal that arrives after each of the first eight trading rounds. In our baseline treatment the realization of the signal is public information, and in another treatment, market participants are randomly sequenced and receive the signal as private information. In the latter case, we observe zero information aggregation and prices lock in on home grown norms, which we call informational price cascades. We test the fragility of the price cascades in two further treatments. First, we break the monopoly on each signal by revealing it to two subjects, and then we increase that number to four. It is only when we inform four participants, or one-half of the market, that cascades fail to form and information starts to aggregate in the market. |
| Keywords: | Information cascade; information aggregation; experiment; asset market |
| JEL: | C92 D82 G12 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:002023&r=cta |
| By: | Haiqiang Chen; Paul Moon Sub Choi |
| Abstract: | We document differential private information in cross-border asset pricing using the probability of informed trading (PIN) for Canadian shares traded on both sides of Niagara Falls. Relative to the New York Stock Exchange (NYSE), the Toronto Stock Exchange (TSX) hasmore informed trades and a larger information share. This cross-border information imbalance is associated with small but positive price premiums in New York as predicted by a model. The dynamics of these premiums depends on trade informativeness. Lastly, the PIN for TSX trading typically rises upon cross-listing on the NYSE, which is consistent with the negative event-study response. |
| Keywords: | Cross-listing, Probability of informed trading, Information share, Price discovery, Convergence speed, Bid–ask spread |
| JEL: | G15 G14 D82 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002166&r=cta |
| By: | Yi-Fang Liu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); Wei Zhang (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University); Chao Xu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University); Jørgen Vitting Andersen (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); Hai-Chuan Xu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University) |
| Abstract: | This paper studies the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First, we verify that our model is able to reproduce some of the stylized facts in real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers. |
| Keywords: | Agent-based model; heterogeneity; switching behavior; market volatility |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00983051&r=cta |
| By: | Chenghu Ma |
| Abstract: | This paper is to provide a theoretical foundation of incomplete contract in an extensive game of multi-agent interaction. It aims to explain why rational agents may agree upon incomplete contracts even though it is costless to sign a complete one. It is argued that an incomplete contract creates strategic uncertainty. If agents’ attitudes toward uncertainty are not neutral, then an incomplete contract as final solution can be the consequence of common knowledge of rationality. This paper assumes that all agents are uncertainty averse in a sense of Gilboa and Schmeidler (1989); and that agents can form coalitions as part of strategic play. All these are embedded into a newly proposed equilibrium solution concept for extensive form game of perfect information. |
| Keywords: | uncertainty aversion, strategic uncertainty, coalitionformation, stability and core-criterion. |
| JEL: | C70 C71 C72 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:001970&r=cta |
| By: | Chenghu Ma |
| Abstract: | This paper is to provide a theoretical foundation of incomplete contract in an extensive game of multi-agent interaction. It aims to explain why rational agents may agree upon incomplete contracts even though it is costless to sign a complete one. It is argued that an incomplete contract creates strategic uncertainty. If agents' attitudes toward uncertainty are not neutral, then an incomplete contract as final solution can be the consequence of common knowledge of rationality. This paper assumes that all agents are uncertainty averse in a sense of Gilboa and Schmeidler (1989); and that agents can form coalitions as part of strategic play. All these are embedded into a newly proposed equilibrium solution concept for extensive form game of perfect information. |
| Keywords: | uncertainty aversion, strategic uncertainty, coalition-formation, stability and core-criterion. |
| JEL: | C70 C71 C72 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002104&r=cta |
| By: | Aptus, Elias; Britz, Volker; Gersbach, Hans |
| Abstract: | We examine the impact of so-called Crisis Contracts on bank managers' risktaking incentives and on the probability of banking crises. Under a Crisis Contract, managers are required to contribute a pre-specified share of their past earnings to finance public rescue funds when a crisis occurs. This can be viewed as a retroactive tax that is levied only when a crisis occurs and that leads to a form of collective liability for bank managers. We develop a game-theoretic model of a banking sector whose shareholders have limited liability, so that society at large will suffer losses if a crisis occurs. Without Crisis Contracts, the managers' and shareholders' interests are aligned, and managers take more than the socially optimal level of risk. We investigate how the introduction of Crisis Contracts changes the equilibrium level of risk-taking and the remuneration of bank managers. We establish conditions under which the introduction of Crisis Contracts will reduce the probability of a banking crisis and improve social welfare. We explore how Crisis Contracts and capital requirements can supplement each other and we show that the efficacy of Crisis Contracts is not undermined by attempts to hedge. -- |
| Keywords: | banking crises,Crisis Contracts,excessive risk taking,banker's pay,hedging,capital requirements |
| JEL: | C79 G21 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:453&r=cta |
| By: | Dong, Ming |
| Abstract: | A greater firm-level transparency through enhanced disclosure provides more information regarding the risk situation of an insurer to its outside stakeholders such as stock investors and policyholders. The disclosure of the insurer's risktaking can result in negative influences on, for example, its stock performance and insurance demand when stock investors and policyholders are risk-averse. Insurers, which are concerned about the potential ex post adverse effects of risk-taking under greater transparency, are thus inclined to limit their risks ex ante. In other words, improved firm-level transparency can induce less risktaking incentive of insurers. This article investigates empirically the relationship between firm-level transparency and insurers' strategies on capitalization and risky investments. By exploring the disclosure levels and the risk behavior of 52 European stock insurance companies from 2005 to 2012, the results show that insurers tend to hold more equity capital under the anticipation of greater transparency, and this strategy on capital-holding is consistent for different types of insurance businesses. When considering the influence of improved transparency on the investment policy of insurers, the results are mixed for different types of insurers. -- |
| Keywords: | transparency,risk-taking,market discipline |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:icirwp:1414&r=cta |
| By: | Yan He; Hai Lin; Chunchi Wu; Uric B. Dufrene |
| Abstract: | We investigate the information cost of stock trading during the 2000 presidential election. We find that the uncertainty of the election induces information asymmetry of politically sensitive firms under the Bush/Gore platforms. The unusual delay in election results creates a significant increase in the adverse selection component of the trading cost of politically sensitive stocks. Cross-sectional variations in bid-ask spreads are significantly and positively related to changes in information cost, controlling for the effects of liquidity cost and stock characteristics. This empirical evidence is robust to different estimation methods. |
| Keywords: | Presidential election; Information asymmetry; Transaction costs; Bid-ask spreads; Adverse selection cost |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:journl:002085&r=cta |
| By: | Yan He; Hai Lin; Chunchi Wu; Uric B. Dufrene |
| Abstract: | We investigate the information cost of stock trading during the 2000 presidential election. We find that the uncertainty of the election induces information asymmetry of politically sensitive firms under the Bush/Gore platforms. The unusual delay in election results in a significant increase in the adverse selection component of trading cost of politically sensitive stocks. Cross-sectional variations in bid-ask spreads are significantly and positively related to changes in information cost, controlling for the effects of liquidity cost and stock characteristics. This empirical evidence is robust to different estimation methods. |
| Keywords: | Presidential election; information asymmetry; transaction costs; bid-ask spreads; adverse selection cost |
| JEL: | G0 G14 |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:001975&r=cta |