Herding and contrarianism in a financial trading experiment with endogenous timing
Park, Andreas and Sgroi, Daniel (2008) Herding and contrarianism in a financial trading experiment with endogenous timing. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers).
WRAP_Park_twerp_868.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
We undertook the first market trading experiments that allowed heterogeneously informed subjects to trade in endogenous time, collecting over 2000 observed trades. Subjects' decisions were generally in line with the predictions of exogenous-time financial herding theory when that theory is adjusted to allow rational informational herding and contrarianism. While herding and contrarianism did not arise as frequently as predicted by theory, such behavior occurs in a significantly more pronounced manner than in comparable studies with exogenous timing. Types with extreme information traded earliest. Of those with more moderate information, those with signals conducive to contrarianism traded earlier than those with information conducive to herding.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Information theory in finance, Stock exchanges -- Research, Rational expectations (Economic theory), Endogenous growth (Economics), Stocks -- Prices -- Mathematical models|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Date:||1 October 2008|
|Number of Pages:||56|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Economic and Social Research Council (Great Britain) (ESRC), Leverhulme Trust (LT), Social Sciences and Humanities Research Council of Canada (SSHRC), Cambridge Endowment for Research in Finance (CERF)|
|Version or Related Resource:||Park, A. and Sgroi, D. (2008). Herding and contrarianism in a financial trading experiment with endogenous timing. [Toronto] : Economics Department, University of Toronto. (University of Toronto research papers, no.341).|
|References:||Alevy, Jonathan E., Michael S. Haigh, and John A. List, “Information Cascades: Evidence from a Field Experiment with Financial Market Professionals,” Journal of Finance, February 2007, LXII (1), 151–180. Anderson, L. and C. Holt, “Informational Cascades in the Laboratory,” American Economic Review, 1997, 87, 847–862. Avery, C. and P. Zemsky, “Multi-Dimensional Uncertainty and Herd Behavior in Financial Markets,” American Economic Review, 1998, 88, 724–748. Back, Kerry and Shmuel Baruch, “Information in Securities Markets: Kyle meets Glosten and Milgrom,” Econometrica, March 2004, 72 (2), 433–466. Banerjee, A.V., “A Simple Model of Herd Behavior,” Quarterly Journal of Economics, 1992, 107, 797–817. Bikhchandani, S. and S. Sunil, “Herd Behavior in Financial Markets: A Review,” Staff Paper WP/00/48, IMF 2000. , D. Hirshleifer, and I. Welch, “Theory of Fads, Fashion, Custom, and Structural Change as Informational Cascades,” Journal of Political Economy, 1992, 100, 992– 1026. Bloomfield, Robert, Maureen O’Hara, and Gideon Saar, “The ‘make or take’ decision in an electronic market: Evidence on the evolution of liquidity,” Journal of Financial Economics, January 2005, 75 (1), 165–199. Brunnermeier, Markus K., Asset Pricing under Asymmetric Information – Bub- bles, Crashes, Technical Analysis, and Herding, Oxford, England: Oxford University Press, 2001. Chakraborty, Archishman and Bilge Yilmaz, “Informed Manipulation,” Journal of Economic Theory, 2004, 114 (1), 132–152. Chamley, C. and D. Gale, “Information Revelation and Strategic Delay in a Model of Investment,” Econometrica, 1994, 62, 1065–1085. Chamley, Christophe, Rational Herds, Cambridge, United Kingdom: Cambridge University Press, 2004. Cipriani, Marco and Antonio Guarino, “Herd Behavior in a Laboratory Financial Market,” American Economic Review, 2005, 95 (5), 1427–1443. and , “Herd Behavior in Financial Markets: A Field Experiment with Financial Market Professionals,” mineo, UCL and GWU June 2007. Costa-Gomes, M., V. Crawford, and B. Broseta, “Cognition and Behavior in Normal-Form Games: An Experimental Study,” Econometrica, 2001, 69, 1193–1235. Drehmann, Mathias, J¨org Oechssler, and Andreas Roider, “Herding and Contrarian Behavior in Financial Markets: An Internet Experiment,” American Economic Review, 2005, 95 (5), 1403–1426. Glosten, L.R. and P.R. Milgrom, “Bid, Ask and Transaction Prices in a Specialist Market with Heterogenously Informed Traders,” Journal of Financial Economics, 1985, 14, 71–100. Hasbrouck, Joel, Empirical Market Microstructure, Oxford University Press, 2007. Ivanov, Asen, Dan Levin, and James Peck, “Hindsight, Foresight, and Insight: An Experimental Study of a Small-Market Investment Game with Common and Private Values,” American Economic Review, 2008, forthcoming. Kahneman, Daniel and Amos Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, March 1979, 47 (2), 263–292. Kyle, A.S., “Continuous Auctions and Insider Trading,” Econometrica, 1985, 53, 1315– 1336. Levin, Dan and James Peck, “Investment Dynamics with Common and Private Values,” Journal of Economic Theory, 2008, forthcoming. McKelvey, R.D. and T.R. Palfrey, “Quantal Response Equilibria for Normal Form Games,” Games and Economic Behavior, 1995, 10, 6–38. and , “Quantal Response Equilibria for Extensive Form Games,” Experimental Economics, 1998, 1, 9–41. Milgrom, Paul, “Good news and bad news: representation theorems and applications,” The Bell Journal of Economics, 1981, 12, 380–91. Park, Andreas and Daniel Sgroi, “When Herding and Contrarianism Foster Market Efficiency: A Financial Trading Experiment,” Working Paper, Universities of Toronto and Warwick 2008. and Hamid Sabourian, “Herding and Contrarian Behavior in Financial Markets,” Working Paper, Universities of Toronto and Cambridge 2008. Sgroi, Daniel, “The Right Choice at the Right Time: A Herding Experiment in Endogenous Time,” Experimental Economics, October 2003, 6 (2), 159–180. Shiller, R., “How a Bubble Stayed Under the Radar,” New York Times, 2008, March 2. Smith, Lones, “Private Information and Trade Timing,” American Economic Review, 2000, 90, 1012–1018. Tversky, Amos and Daniel Kahneman, “Advances in Prospect Theory: Cumulative Representation of Uncertainty,” Journal of Risk and Uncertainty, 1992, 5, 297–323. Vives, Xavier, Information and Learning in Markets, Princeton University Press, 2008.|
Actions (login required)