Financial markets with asymmetric information: A pilot study focusing on insider advantages

Abstract This paper develops a design for laboratory market experiments and discusses the results of a pilot investigation. Subjects could trade an artificial risky asset on a call market (double-sided sealed-bid, or batched, auction). The participants were divided in two groups: informed traders (who knew the asset's fundamental value) and uninformed traders (who could only observe the market price). The objective of the experiment was to study the extent to which insiders were able to exploit their advantage, and whether or not information is revealed through market prices. Participants' risk attitudes and initial endowment positions were analyzed with respect to their impact on investment decisions. We find that portfolio behavior is influenced by the initial endowment structure, whereas individual risk attitudes do not explain observed portfolio structures. As to the distribution of information, insiders could partially exploit their advantage in terms of final portfolio values. Outsiders showed to be able to use the market price in order to infer information about the fundamental value.

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