Information Exchange and Social Trading in Experimental Asset Markets
- Nilanjan ROY (Principal Investigator / Project Coordinator)Department of Economics and Finance
- Yohanes Eko RIYANTO (Co-Investigator)
DescriptionIn modern developed societies, markets play a central role in the normal functioning and growth of the economy. In the present inter-connected world, understanding the specific properties with respect to pricing and market failure is of vital importance. Two such properties are: (a) asset price bubbles which emerge when individuals err collectively in pricing such that they consistently trade at prices that are further away from the fundamental value of an asset and (b) reaction to news regarding fundamental value of the asset. The last two decades of research have significantly enhanced our understanding of why bubbles occur and which features of the asset market are more likely to cause bubbles. We plan to contribute to this literature by investigating the impact of social trading on asset market outcomes. In the last few years, the market for online social network platforms has evolved rapidly that allows investors to tap into the wisdom of crowds while making investment decisions. Some examples of popular platforms are ayondo, eToro, and ZuluTrade. Millions of investors are using these networks and assets under the management of social trading platforms are reported to amount to several billion euros. Traders on such platforms are provided with the chance to interact with one another, view each other’s ranking, copy the buy-and-sell actions of others and even delegate part of their wealth to others. Although it is often argued that social trading positively influences the market by encouraging market participation, it remains unclear whether such institutions help eliminate or even reduce mis-pricing, and dampen the over/under-reaction of market to news about fundamental value of the asset. The principal goal of the proposed research is to integrate the element of social interaction into financial decision making in asset markets using the methodology of experimental economics. In the laboratory, the possibility of external shocks can be ruled out and the fundamental value of the asset is known to each trader – a condition that can seldom be satisfied in the outside world. Such a setting would allow us to control the confounding factors and focus on change in one particular variable of interest while holding other factors constant. We believe that our research would have implications for a broader research agenda on the impact of information exchange among investors in experimental asset markets. Such information exchange could include word-of-mouth communication, private information regarding fundamentals, and portfolio information sharing with peers.
|Effective start/end date||1/12/18 → 16/11/22|