Financial Contagion: An Experimental Analysis
Background:
This is an experimental analysis of contagion in financial markets. The theoretical literature has illustrated several channels of financial contagion: informational spillovers (King and Wadhwani, 1990), herd behaviour (Cipriani and Guarino, 2003), liquidity shocks (Calvo, 1999), portfolio rebalancing (Kodres and Pritsker, 2002). The empirical analysis, however, has found it difficult to guage the relative importance of these channels. The problem for the empirical research is the lack of data on the private information available to the traders and on the sources of the shocks buffeting the economy. This problem can be overcome in an experimental study, where one can observe variables not available for actual financial markets. We plan to run a series of experiments where informed subjects trade financial assets among themselves or with a market maker. Subjects are buffeted by different shocks, to their payoffs of to their endowments. By observing their behaviour, we will estimate the relative importance of the various channels of transmission of shocks across markets. We will be able to test directly the predictions of the theoretical models of contagion, thus creating a bridge between the empirical and the theoretical literatures. In the laboratory we may also identify behavioural trading rules that are not discussed in the theoretical models, but nevertheless used by decision makers. Such biases may exacerbate or limit the transmission of shocks across markets. Experimental results will also help to understand the field data, by shedding light on decision makers behaviour and reaction to different shocks. Finally, by changing the trading rules in the experiments, we will study the role financial markets regulation in shaping the transmission of shocks to asset prices across financial markets.
Publications:
WEF0047
Herd Behavior in Financial Markets: An Experiment with Financial Market
Professionals
Marco Cipriani, and Antonio Guarino
February 2008
WEF0046
When Half the Truth is Better than the Truth: A Theory of Aggregate Information Cascades
Antonio Guarino, Heike Harmgart and Steffen Huck
October 2008
WEF0045
No-Trade in the Laboratory
Marco Angrisani, Antonio Guarino, Steffen Huck and Nathan Larson
September 2008
WEF0008
Transaction Costs and Informational Cascades in Financial Markets: Theory and Experimental Evidence
Antonio Guarino and Marco Cipriani
March 2006
Researchers:
Dr Antonio Guarino
Dr Marco Cipriani
Prof. Steffen Huck
Contact:
Dr Antonio Guarino
Department of Economics & ELSE
University College London
Gower Street
London
WC1E 6BT
Tel: 020 7679 5862
email: a.guarinoi@ucl.ac.uk
Duration of Research:
May 2006 - April 2009