The effect of sequential information arrival on asset prices: an experimental study
Article Abstract:
A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (ie., asset allocation), and bid-ask spreads. In this paper, these variables are observed in a controlled setting - a computerized double auction market, similar to NASDAQ. Our laboratory allows experimental control of information arrival - whether simultaneously or sequentially received, and whether homogeneous or heterogeneous. We compare the price, volume, and share allocations of three market equilibrium models: telepathic rational expectations, which assumes that traders can read each others minds (strong-form market efficiency); ordinary rational expectations, which assumes traders can use (some) market price information, (a type of semi-strong form efficiency); and private information, where traders use no market information. We conclude (1) that stronger-form market models predict equilibrium prices better than weaker-form models, (2) that there were fewer misallocation forecasts in simultaneous information arrival (SIM) environments, (3) that trading volume was significantly higher in SIM environments, (4) and that bid-ask spreads widen significantly when traders are exposed to price uncertainty resulting from information heterogeneity. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1987
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On the feasibility of automated market making by a programmed specialist
Article Abstract:
Securities trading is done through the execution of orders, with admissible orders, such as market orders and limit orders, giving rise to discontinuous aggregate demand functions that are composed of several levels. The balancing of excesses caused by discontinuities through intervention, or demand smoothing, is one fundamental operation that can be assigned to a specialist. The specialist's activity can be automated, in principle, when the 'affirmative obligation' is completely specified, and here an attempt is made through simulation to analyze some of the results of the use of a programmed specialist whose automated market making is limited to demand smoothing. Several alternative rules of operation are simulated, and a number of the rules are shown to perform well, particularly the simple rule calling for the programmed specialist to minimize absolute share holdings in securities at every trading point through total rather than local demand smoothing. Even in thin markets the results show that the underlying costs of demand smoothing are near a fraction of a cent per share traded.
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1985
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