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Informational contagion in the laboratory
We study the informational channel of financial contagion in the laboratory. In our experiment, two markets with correlated fundamentals open sequentially. In both markets, subjects receive private information. Subjects in the market opening second also observe the history of trades and prices in the first market. We find that although in both markets private information is only imperfectly aggregated, subjects are able to make correct inferences based on the public information coming from the market that opens first. As a result, we observe financial contagion in the laboratory: Indeed, the correlation between asset prices is very close to that predicted by the theory. Finally, as theory predicts, there is no contagion when asset fundamentals are independent: That is, subjects only react to the history of prices and trades in the first market when it is rational to do so because they convey information.
Cite this item
Marco Cipriani & Antonio Guarino & Giovanni Guazzarotti & Federico Tagliati & Sven Fischer, Informational contagion in the laboratory, Federal Reserve Bank of New York, Staff Reports 715, 01 Mar 2015.
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- G01 - Financial Economics - - General - - - Financial Crises
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
Keywords: information contagion; laboratory experiment
This item with handle RePEc:fip:fednsr:715
is also listed on EconPapers
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