Date post: | 31-Dec-2015 |
Category: |
Documents |
Upload: | clinton-mcbride |
View: | 16 times |
Download: | 0 times |
Outline In-Class Experiment on Security Markets with Insider
Information
Test of Rational Expectation Hypothesis I: Plott and Sunder (1982) Can market be used to disseminate information? (or does price reflect
insider information?)
Test of Rational Expectation Hypothesis II: Plott and Sunder (1988) Can market be used to aggregate diverse information? (or does price
reflect aggregate information?)
Field Application at HP: Kay-Yut Chen, Senior Scientist, HP Lab
Dissemination versus Aggregation
DisseminationThree states: X, Y, Z.At the beginning of the period, the state was drawn.If the state was X, then half of the traders were told that the
state was X (insiders) and the other half did not receive any clues.
AggregationThree states: X, Y, Z.At the beginning of the period, the state was drawn.If the state was X, then half of the traders were given that
the state was not Y and the other half were told that the state was not Z.
Induced Preference
rate)n (conversio
purchases) of (costs
sales) from (revenue
) of end at the held (units 0
) stateon depends francs,in rate (dividend 0)(
]([
i
p
itp
s
its
ti
i
p
ti
itp
s
its
tiiii
ti
P
P
tx
d
CPPxdaR
Controls on Cash and Security Flow
)experiment ofcost thereduce toimposed cost was fixed(A 0
allowed)not is sellshort sincesupply (Fixed
)Securities ofEndowment (Initial
Capital) ofEndowment (Initial
i
i
ti
ti
ti
a
x
x
C
Trading and Cash Flow Recording t
iti Cx
ia
tii xd (
Profit Recording and Cash Earning
Investor Type andExpected Dividend Rate
Hypotheses
Prior-Information (PI) Hypothesis (Null): Expectations are exogenous to the price formation processExpectations are formed based on prior informationInsiders have an advantage
Rational Expectation (RE) Hypothesis: Condition expectations on pricesPrices fully reveal state-of-nature Insiders do not have an advantage
Information Design
Information Design
Urn X and Urn Y: Imperfect Information in Market 1
I I
I
Urn X Urn Y
Dependent Variables
Price
Allocation
Profits
Efficiency
Price Determination
Expectations formed by either rational-expectation or prior information
Prices are determined by the implied demand and supply schedules in a double auction market mechanism
PI versus RE: Price and Allocation
Investor Type andExpected Dividend Rate
Demand and Supply SchedulesCondition on PI Expectation
Profits
PI: Profits of insiders are greater than the profits of uninformed agents
RE: Profits of insiders and the uninformed agents converge to equality
Efficiency (E) and Trading Efficiency (TE)
)Trade No()|ˆ(
)|Trade No()|( )(Efficieny Trading
)|ˆ(
)|(
on dconditione ,ˆ ,Allocation RE ofReturn Expected
on dconditione , ,Allocation Retrun to Expected)(Efficiency
|IERIAER
IERIAERTE
IAER
IAER
IA
IAE
Efficiency (E) and Trading Efficiency (TE)
PI versus RE: Price and Allocation
Information Design
Information Design
Market 2
Market 3
Market 4
Market 5: Two versus Three States of Nature
Market 1: Perfect vs. Imperfect Information
PI versus RE: Allocation Distribution in All Markets
PI versus RE: Allocation Distribution in All Markets
PI and RE make different predictions in 36 out of 61 periods
In 29 out of 36 periods, error from allocations predicted by the RE model is smaller
In 18 out of 36 periods, the RE model made no errors at all. The PI model made zero errors in only 2 out of 36 periods
Profit or Wealth Distribution
Efficiency (E) and Trading Efficiency (TE)
Getting closer to RE as time progresses
Activity of Insider in the Early Rounds
In four out of 5 markets relative activity of insiders decreases with time.
It seems the competing bids and offers among insiders during the opening stages of a period, reveals the state to the uninformed.
Is this a Fair Game?
zeroalmost is )(log
changes price log ofn correlatio serialorder -First
(3.12)
Price) Trading Average - Price mEquilibriu(609.086.1
1e
t
t
t
P
P
BH