Event Women in EF

Rosemarie Nagel on which information prices reveal

Rosemarie Nagel (Universitat Pompeu Fabra) presents per paper “Do prices reveal information about dividends in asymmetric sequential asset markets? An Experimental Study.”

In joint work with Jess Benhabib and Luba Peterson, Rosemarie experimentally tests whether prices reveal information about dividends in a two-period asymmetric information investment game via a call market based on Benhabib and Wang (BW, JET 2015). Endowed with assets, short-term traders value the asset for its sale value. Long-term traders, who hold no assets, value the asset for its dividend, paid at the end of the second period. In our control treatment with complete information, we provide all traders about the dividend paid on all assets, while in an incomplete Information treatment, only the short-term traders know the dividends. In the first period of the game, short-term traders trade among themselves. In the second period, all traders observe the market clearing price. Assets held by short-term traders are sold to long-term traders, theoretically always at the first-period trading price, which is experimentally confirmed. First-period prices, however, show high variability. Under complete information, prices are equal to dividends as in the unique Nash equilibrium. Under incomplete information, we observe multiple pricing behavior, similar to the multiple equilibria calculated in BW (2015). In two incomplete Information sessions, most prices in Period 1 fully reveal the asset’s dividend. In a third session, most prices are anchored near the expected median dividend. However, in three further sessions, most prices qualitatively resemble sunspot equilibria features: they are above (below) the dividend when dividends are lower(higher) than the mean expected dividend. We conclude that prices do not consistently reveal information to uninformed traders. The reason is that there are optimistic and pessimistic short-term traders who do not trade at fundamental dividends. More insights in the working paper.