Price Distortions and Public Information: Theory, Experiments, and Simulations
This paper studies the effects on the asset price of the introduction of a public signal in the presence of asymmetric private information in a decentralized market. We introduce an artificial market model populated by bounded rational agents with heterogeneous levels of reasoning: sophisticated and naive traders. The model captures the main impacts of public information analyzed in the laboratory experiments reported by Ruiz-Buforn et al. (Higher-order beliefs and overweighting of public information in a laboratory financial market, 2019). Public information, when correct, coordinates market activity, improving price convergence to the fundamentals. By contrast, unwarranted public information pushes prices away from fundamentals. This strong influence of public information on prices is primarily driven by its common knowledge property.
The authors are grateful to the Universitat Jaume I under the project UJI-B2018-77 and the Generalitat Valenciana for the financial support under the project AICO/2018/036. Alba Ruiz Buforn acknowledges the Spanish Ministry of Science and Technology under an Formación de Profesorado Universitario (FPU14/01104) grant.
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