Trading Complex Assets / Bruce I. Carlin, Shimon Kogan.

Format:

Book

Author/Creator:

Carlin, Bruce I.

Contributor:

National Bureau of Economic Research.

Kogan, Shimon.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16187.

NBER working paper series no. w16187

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

We perform an experimental study of complexity to assess its effect on trading behavior, price volatility, liquidity, and trade efficiency. Subjects were asked to deduce the value of a particular asset from information they were given about the composition and price of several portfolios. Following that, subjects traded with each other anonymously in a well-defined, simple bargaining process. Portfolio problems ranged from requiring simple analysis to more complicated computation. Complexity altered subjects' bidding strategies, decreased liquidity, increased price volatility, and decreased trade efficiency. Female subjects were affected more by complexity (e.g., lower trade frequency), although they achieved higher payoffs in the complex treatment. Our analysis suggests that complexity may be a driver of volatility and liquidity in financial markets and provides novel testable empirical predictions.

Notes:

Print version record

July 2010.