Overweighting of public information in financial markets: A lesson from the lab

We experimentally study the information aggregation process in a laboratory financial market when a public signal is released. The public disclosure crowds out information demand and reduces price informativeness. The latter effect is primarily caused by the overweighting of public information into prices. We are the first in providing evidence that strategic pricing concerns trigger the overweighting effect and the consequent market overreaction to public disclosures. From an economic policy perspective, we give support that, when deciding their communication strategy, the regulator can mitigate the market overreaction by properly setting the level of information transparency

Welfare effects of public information in a laboratory financial market

This paper addresses the question of how public announcements can affect social welfare in an experimental asset market with costly private information acquisition. More specifically, we analyze how public information affects (i) the aggregate profits and (ii) the level of inequality in the distribution of profits across subjects. Using the data of Ruiz-Buforn et al. (2018), we show that public information disclosure always increases aggregate profits, since it crowds out private information reducing the informational costs. Nevertheless, the effects on the level of wealth inequality are ambiguous. They depend on the relative precision of public and private information and, interestingly, on the realization of the public signal. Thus, public information disclosure leads to a trade-off between increasing aggregate profits and reducing the inequality level

Welfare effects of public information in a laboratory financial market

This paper addresses the question of how public announcements can affect social welfare in an experimental asset market with costly private information acquisition. More specifically, we analyze how public information affects (i) the aggregate profits and (ii) the level of inequality in the distribution of profits across subjects. Using the data of Ruiz-Buforn et al. (2018), we show that public information disclosure always increases aggregate profits, since it crowds out private information reducing the informational costs. Nevertheless, the effects on the level of wealth inequality are ambiguous. They depend on the relative precision of public and private information and, interestingly, on the realization of the public signal. Thus, public information disclosure leads to a trade-off between increasing aggregate profits and reducing the inequality level

Single vs. multiple disclosures in an experimental asset market with information acquisition

We conduct laboratory experiments to study whether increasing the number of independent public signals in an economy with endogenous private information is an effective measure to promote the acquisition of information and to enhance price efficiency. We observe that the release of public information crowds out the traders' demand for private information under a single disclosure while favoring private information acquisition under multiple disclosures. The latter measure improves price accuracy in forecasting the asset fundamental value. However, multiple disclosures do not eliminate the adverse effect of market overreaction to public information, becoming a potential source of fragility for the financial system

The effect of time-varying fundamentals in Learning-to-Forecast Experiments

Inspired by macroeconomic scenarios, we aim to experimentally investigate the evolution of short- and long-run expectations under different specifications of the fundamentals. We collect individual predictions for the future prices in a series of Learning to Forecast Experiments with a time-varying fundamental value. In particular, we observe how expectations evolve in markets where the fundamental value follows either a V-shaped or an inverse V-shaped pattern. These conditions are compared with markets characterized by a constant and a slightly linear increasing fundamental value. We assess whether minor but systematic variations in the fundamentals affect individual short- and long-run expectations by considering positive and negative feedback-expectation systems. Even though such variations in the fundamentals turn out not to strongly affect the way subjects form their expectations in positive feedback markets, we observe significant changes in negative feedback markets

On the determination of the granular size of the economy

Introducing the granular hypothesis, Gabaix (2011) shows that the idiosyncratic shocks of a few “granular” firms account for a significant fraction of aggregate fluctuations of the US business cycle. In the literature, however, the question of how many are the granular firms in an economy is left unanswered. Using Spanish data, we propose a novel methodology to calibrate the granular size of the economy, i.e. the number of granular firms

Crowding out effect and traders' overreliance on public information in financial markets: a lesson from the lab

In this paper, we study experimentally the information aggregation process in a market as a function of the access to different sources of information, namely an imperfect, public and costless signal into a market where the participants have access to costly and imperfect private information. Our results show that the release of public information provokes a crowding out effect on the traders' information demand while it keeps constant market informativeness, but significantly reduces price informativeness. Traders overrely on public information, which has a significant negative impact on the overall market performance. We detect the emergence of the overrelying phenomenon, despite the absence of an explicit incentive to the subjects to coordinate, demonstrating, therefore, that the adverse effects of releasing public information in a financial market are more relevant than generally assumed, based on the results of previous experiments inspired by simple coordination models. Our results pose new questions when a regulatory institution has to decide the appropriate level of transparency of its communication strategy

Empresas granulares y desagregación regional: un análisis del caso español

Following the approach proposed by Gabaix (2011), this paper aims to assess the existence of granularity in the business cycle fluctuations of the following Spanish regions: the Community of Madrid, Catalonia, the Basque Country and the Valencian Community. Granular firms are those that represent a marginal proportion of the total number of firms in an economy, but nevertheless have a significant impact on fluctuations in the GDP growth rate. We find that the Basque Country and the Valencian Community are granular economies. The Community of Madrid and Catalonia, however, do not show granular behaviour. Therefore, our work provides evidence of granular behaviour at the regional level

On the impact of public information in financial markets: an experimental approach

The debate on the “limits of transparency” of the central banks’ communication policy is the inspiration of the present thesis. Specifically, this thesis investigates whether it exists an optimal level of information transparency that the central bank can target in order to manage the economic agents’ expectations without dominating the evolution of financial markets. In this regard, laboratory methods are used to evaluate the impact of disclosing public information on the price informativeness. The experimental design is based on an Arrow-Debreu asset market where traders have access to imperfect private information about the asset value. The primary research question is whether the disclosure of public information improves or impairs informational efficiency

On the impact of public information in financial markets: an experimental approach

The debate on the “limits of transparency” of the central banks’ communication policy is the inspiration of the present thesis. Specifically, this thesis investigates whether it exists an optimal level of information transparency that the central bank can target in order to manage the economic agents’ expectations without dominating the evolution of financial markets. In this regard, laboratory methods are used to evaluate the impact of disclosing public information on the price informativeness. The experimental design is based on an Arrow-Debreu asset market where traders have access to imperfect private information about the asset value. The primary research question is whether the disclosure of public information improves or impairs informational efficiency.Programa de Doctorat en Economia i Empres