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posted on 22.08.2005by Olivier Brandouy, Pascal Barneto, Lawrence Leger
This paper presents the results of a series of experiments in a simulated double-auction stock
market. Price formation was observed under various manipulations of asymmetric information
and communication, including conditions intended to promote imitative behaviour and
rumour. Inefficient prices were observed when the presence of insiders was completely
disguised – that is, prices reflected the expectations of non-insiders. When the presence (but
not the identity) of insiders was revealed there was a sharp increase in imitative behaviour that
appeared to be one-sided – observed prices became efficient with respect to bad news but not
with respect to good news. When subjects were allowed to communicate uncertain
information to create a climate of rumour (they could lie, tell the truth and/or spread rumours
but were forbidden to prove the veracity of any communication) there was a decrease in both
efficiency and price volatility – that is, informational noise appeared to mask the signals of
insiders. Price formation under these conditions was similar to the homogeneous expectations
baseline, but there was also some evidence of speculative pricing.