Futures markets, cognitive ability, and mispricing in experimental asset markets

Noussair, Charles; Tucker, Steven; Xu, Yilong

doi:10.1016/j.jebo.2016.07.010

Cited by 62 publications

(41 citation statements)

References 25 publications

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“…Recent results in single‐asset market experiments point to systematic effects of CRT scores (Corgnet et al. (), Akiyama, Hanaki, and Ishikawa (), Breaban and Noussair (), Noussair, Tucker, and Yu ()). Below, we also measure the effect of gender and risk aversion (as elicited in the investment game) on our mispricing measures to .…”

Section: Measures and Hypothesesmentioning

confidence: 99%

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A Test of the Modigliani‐Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

Charness¹,

Neugebauer²

2018

The Journal of Finance

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Modigliani and Miller show that the total market value of a firm is unaffected by a repackaging of asset return streams to equity and debt if pricing is arbitrage‐free. We investigate this invariance theorem in experimental asset markets, finding value‐invariance for assets of identical risks when returns are perfectly correlated. However, exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated, in which case the law of one price is violated. Discrepancies shrink in consecutive markets, but persist even with experienced traders. In markets where overall trader acuity is high, assets trade closer to parity.

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Section: Measures and Hypothesesmentioning

confidence: 99%

“…, Chan, Lei and Vesely ). Smith and Porter (), Noussair and Tucker (), and Noussair, Tucker, and Yu () report reduced mispricing when a futures market enables subjects to arbitrage price discrepancies of underlying asset and futures contracts.…”

mentioning

confidence: 99%

A Test of the Modigliani‐Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

Charness¹,

Neugebauer²

2018

The Journal of Finance

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“…Several SSW studies collect measures of cognitive ability -most commonly, the three-item Cognitive Reflection Test (CRT) of Frederick (2005) -and correlate traders' scores with their performance or behavior in the market. These studies typically find that higher-ability subjects also tend to attain larger earnings (e.g., Breaban & Noussair, 2015;Corgnet et al, 2015;Cueva & Rustichini, 2015;Noussair et al, 2016). Breaban and Noussair (2015) also find that higher CRT scores are positively associated with the adoption of fundamental strategies, and negatively associated with momentum strategies.…”

Section: Cognitive Abilitymentioning

confidence: 99%

Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets

Butler

Cheung

2019

Biophysical Measurement in Experimental Social Science Research

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte.Asset market bubbles and crashes are a major source of economic instability and inefficiency. Sometimes ascribed to animal spirits or irrational exuberance, their source remains imperfectly understood. Experimental methods can isolate systematic deviations from an asset's fundamental value in a manner not possible on the trading floor. In this chapter, we review evidence from dozens of laboratory experiments that investigate the measurement and manipulation of an array of psychological and biophysical attributes.Measures of emotion self-regulation and interoceptive ability are informative, as is cognitive ability and the level and fluctuation of hormones. Rules that promote deliberative decision making can improve market efficiency, while incidental emotions can impair it. Signals in specific brain areas can be a trigger precipitating a bubble's collapse. We conclude that trading decisions are profoundly biophysical in a manner not captured by efficient markets models, and close with speculations on implications for algorithmic trading. JEL Classification:C92, D91, G12, G41

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“…Notable exceptions are Armantier et al (2013) who explore auction design for the U.S. Treasury's disposal of troubled assets and Keser et al (2017) who experimentally examine rating agency regulation. 1 For relatively recent studies, see Haruvy and Noussair (2006), Bossaerts et al (2007), Haruvy et al (2007), Bossaerts et al (2010), Palan (2010), Cheung and Palan (2012), Kirchler et al (2012), Sutter et al (2012), Huber and Kirchler (2012), Cheung et al (2014), Füllbrunn et al (2014a), Füllbrunn et al (2014b), Noussair et al (2016), Bao et al (2017), Holt et al (2017), Bosch-Rosa et al (2018), Crockett et al (2018), and Kopányi-Peuker and .…”

Section: Introductionmentioning

confidence: 99%

Credit Default Swap Regulation in Experimental Bond Markets

2019

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Credit default swaps (CDS) played an important role in the financial crisis of 2008. While CDS can be used to hedge risks, they can also be used for speculative purposes (as occurred during the financial crisis) and regulations have been proposed to limit such speculative use. Here, we provide the first controlled experiment analyzing the pricing of credit default swaps in a bond market subject to default risk. We further use the laboratory as a testbed to analyze CDS regulation. Our results show that the regulation achieves the goal of increasing the use of CDS for hedging purposes while reducing the use of CDS for speculation. This success does not come at the expense of lower bond IPO revenues and does not negatively affect CDS prices or bond prices in the secondary market.

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Futures markets, cognitive ability, and mispricing in experimental asset markets

Cited by 62 publications

References 25 publications

A Test of the Modigliani‐Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

A Test of the Modigliani‐Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets

Credit Default Swap Regulation in Experimental Bond Markets

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