palan - bubbles and crashes in experimental asset markets (2009)

[...]... information of private investors 1 Tremel (1969) for example wrote about trade as early as in the neolithic, and mentions fortified marketplaces in the bronze age See also Walter (2006) and Lowry (2007) S Palan, Bubbles and Crashes in Experimental Asset Markets, Lecture Notes in Economics and Mathematical Systems 626, DOI: 10.1007/97 8-3 -6 4 2-0 214 7-3 _1, # Springer-Verlag Berlin Heidelberg 2009 1 2 1 Introduction... S Palan, Bubbles and Crashes in Experimental Asset Markets, Lecture Notes in Economics and Mathematical Systems 626, DOI: 10.1007/97 8-3 -6 4 2-0 214 7-3 _2, # Springer-Verlag Berlin Heidelberg 2009 11 12 2 Literature Review and documented its evolution over the three decades spanned by these papers Fama defined an efficient market as “A market in which prices always ‘fully reflect’ available information,”2 and. .. price bubbles in financial markets be reduced if markets are provided with the forward-looking price information from digital option markets? Since high-quality price information is very valuable for both corporate finance (M&A, hedging, valuation, etc.) and financial markets (derivative pricing, possible reduction of the frequency and size of bubbles) , improved pricing information from prediction markets. .. considering that on the one hand, trading in online prediction markets requires lower capital than conventional derivatives markets, thus possibly attracting more diverse traders who are likely to hold more diverse information On the other hand, these markets are 8 A more detailed overview of the research into the role derivative markets play in information dissemination and incorporation is given in Sect... of their customers and fellow financial institutes, they ran into liquidity constraints, forcing them to limit their lending activity This in turn led to an increase in defaults on debt by borrowers who could not refinance their outstanding loans, which – in a continuation of this 7 The literature on price bubbles is summarized in Sect 2.1.3 1.3 The Role of Derivative Markets in Informational Efficiency... their information in traditional stock markets They are rather shown to take their business to options 2.2 Literature on Information and Derivative Markets 19 and futures markets, since these markets offer larger absolute returns with lower capital investment than the markets for the respective underlying The major findings from these studies are summarized in the following paragraphs Manaster and Rendleman... heterogeneous findings underline the novelty of the field While not specifically focusing on prediction markets, this study nonetheless offers new evidence on markets ability to process information and harmonize expectations 2.4 Literature on Experiments in Economics21 Economists began analyzing the special properties and functioning principles of market-based exchange in the eighteenth and beginning nineteenth... investigating the impact of derivative markets on the informational efficiency of spot markets that was briefly introduced above and is described in more detail in Sect 2.2 It formed the starting point of the methodological approach followed in the present study This approach consisted of programming an experimental asset market environment similar to that employed in Smith et al (1988), and complementing... parallel decline in GDP growth and stock valuation in the early 1990s, as well as the delayed response in the unemployment rate Examples like this one illustrate the possible benefits of reducing such anomalies in financial markets – a goal that this book hopes to advance, by helping the economic discipline in gaining a better understanding of the bubble phenomenon.7 The bursting of the bubble in real estate... market prices indicate an informational inefficiency which is potentially accompanied by negative repercussions for allocational and production efficiency 2.2 Literature on Information and Derivative Markets In Grossmann (1976), Grossman provided some of the most in uential insights into the role of information in markets He constructed a simple model of a market with a single risky asset and traders who . Karl‐Franzens‐University Graz and the government of the province of Styria, Austria. ISSN 007 5-8 442 ISBN 97 8-3 -6 4 2-0 214 6-6 e-ISBN 97 8-3 -6 4 2-0 214 7-3 DOI 10.1007/97 8-3 -6 4 2-0 214 7-3 Springer Heidelberg Dordrecht. (2007). S. Palan, Bubbles and Crashes in Experimental Asset Markets, Lecture Notes in Economics and Mathematical Systems 626, DOI: 10.1007/97 8-3 -6 4 2-0 214 7-3 _1, # Springer-Verlag Berlin Heidelberg. Examples xv 1 Introduction and Motivation 1 1.1 Prediction Markets and Online Betting Sites 1 1.2 Bubbles and Crashes in Financial Markets 2 1.3 The Role of Derivative Markets in Informational