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Federal Reserve Bank of New York
Staff Reports
Informational contagion in the laboratory
Marco Cipriani
Antonio Guarino
Giovanni Guazzarotti
Federico Tagliati
Sven Fischer
Abstract

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.


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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.
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Keywords: information contagion; laboratory experiment
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