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The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study

Thomas E. Copeland and Daniel Friedman
The Journal of Finance
Vol. 42, No. 3, Papers and Proceedings of the Forty-Fifth Annual Meeting of the American Finance Association, New Orleans, Louisiana, December 28-30, 1986 (Jul., 1987), pp. 763-797
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328387
Stable URL: http://www.jstor.org/stable/2328387
Page Count: 35
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The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study
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Abstract

A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (i.e., 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.

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