By: |
Cary Deck (Department of Economics, Finance and Legal Studies, University of Alabama and Economic Science Institute, Chapman University);
Tae In Jun (Department of Economics, Finance and Legal Studies, University of Alabama);
Laura Razzolini (Department of Economics, Finance and Legal Studies, University of Alabama);
Tavoy Reid (Department of Economics, Finance and Legal Studies, University of Alabama) |
Abstract: |
The efficient market hypothesis predicts that asset prices reflect all
available information. A seminal experiment reported that contingent claim
markets could yield market outcomes consistent with information aggregation
when traders hold heterogeneous state-contingent values. However, a recent
experiment found the rational expectation model outperformed the prior
information and maxi-min models in contingent claim markets when traders hold
homogeneous values despite the no trade equilibrium in that setting. But that
same study failed to replicate the original result calling into question when,
if ever, prices reliably reflect the aggregate information of traders with
heterogeneous values. In this paper, we show contingent claim markets can
robustly yield prices consistent with the efficient market hypothesis when
traders hold heterogeneous values in certain circumstances. The key
distinction between our environment and that of the previous studies is that
we consider trader values that are correlated and not too dissimilar. |
Keywords: |
Information Aggregation, Rational Expectations, Laboratory Experiments |
JEL: |
C9 D8 G1 |
Date: |
2022 |
URL: |
http://d.repec.org/n?u=RePEc:chu:wpaper:22-13&r= |