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Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models

Plott, Charles R. and Sunder, Shyam (1980) Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models. Social Science Working Paper, 331. California Institute of Technology , Pasadena, CA. (Unpublished)

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The study reports on the applicability of competing models of market information integration and dissemination in explaining the behavior of simple laboratory, one-period security markets. Returns to the security depended upon a randomly chosen state of nature. Some agents (insiders), whose identity was unknown to other agents, knew the state before the markets opened. With replication of market conditions a model based upon rational expectations principles is relatively accurate. Prices adjusted immediately to near rational expectations prices; profits of insiders were virtually indistinguishable from noninsiders; and efficiency levels converged to near 100 percent.

Item Type:Report or Paper (Working Paper)
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Additional Information:Revised preliminary draft. Original dated to July 1980. The financial support of the National Science Foundation, Coopers and Lybrand Foundation, and the Caltech Program for Enterprise and Public Policy is gratefully acknowledged. We have benefited from many conversations with Robert Forsythe and James Jordan. We would also like to thank Stanley Reiter whose comments led to experiment 5. Published as Plott, Charles R., and Shyam Sunder. "Efficiency of experimental security markets with insider information: An application of rational-expectations models." Journal of political economy 90.4 (1982): 663-698.
Group:Social Science Working Papers
Funding AgencyGrant Number
Coopers and Lybrand FoundationUNSPECIFIED
Caltech Program for Enterprise and Public PolicyUNSPECIFIED
Subject Keywords:Securities markets, Modeling, Dividends, Equilibrium prices, State of nature, Efficient markets, Economic expectations, Market prices, Rational expectations theory, Political economy
Series Name:Social Science Working Paper
Issue or Number:331
Record Number:CaltechAUTHORS:20171010-135309558
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:82260
Deposited By: Jacquelyn Bussone
Deposited On:11 Oct 2017 18:20
Last Modified:03 Oct 2019 18:52

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