Price Distortions and Public Information: Theory, Experiments, and Simulations

  • Alba Ruiz-Buforn
  • Simone AlfaranoEmail author
  • Eva Camacho-Cuena


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.

Supplementary material


  1. Allen F, Morris S, Shin HS (2006) Beauty contests and iterated expectations in asset markets. Rev Finan Stud 19(3):719–752CrossRefGoogle Scholar
  2. Camerer C, Weigelt K (1991) Information mirages in experimental asset markets. J Bus 64:463–493CrossRefGoogle Scholar
  3. Camerer CF, Ho T-H, Chong J-K (2004) A cognitive hierarchy model of games. Q J Econ 119(3):861–898CrossRefGoogle Scholar
  4. Corgnet B, DeSantis M, Porter D (2015) Revisiting information aggregation in asset markets: reflective learning & market efficiency. ESI Working PapersGoogle Scholar
  5. Duffie D (2012) Dark markets: asset pricing and information transmission in over-the-counter markets. Princeton University PressGoogle Scholar
  6. Duffie D, Gârleanu N, Pedersen LH (2005) Over-the-counter markets. Econometrica 73(6):1815–1847CrossRefGoogle Scholar
  7. Duffie D, Malamud S, Manso G (2015) Reprint of: information percolation in segmented markets. J Econ Theory 158:838–869CrossRefGoogle Scholar
  8. Duffie D, Manso G (2007) Information percolation in large markets. Am Econ Rev 97(2):203–209CrossRefGoogle Scholar
  9. Grossman SJ, Stiglitz JE (1980) On the impossibility of informationally efficient markets. Am Econ Rev 70:393–408Google Scholar
  10. Hayek FA (1945) The use of knowledge in society. Am Econ Rev 35(4):519–530Google Scholar
  11. Morris S, Shin HS (2002) Social value of public information. Am Econ Rev 92(5):1521–1534CrossRefGoogle Scholar
  12. Morris S, Shin HS (2005) Central bank transparency and the signal value of prices. Brook Papers Econ Act 2005(2):1–66CrossRefGoogle Scholar
  13. Plott CR, Sunder S (1982) Efficiency of experimental security markets with insider information: an application of rational-expectations models. J Polit Econ 90(4):663–698CrossRefGoogle Scholar
  14. Plott CR, Sunder S (1988) Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica 56:1085–1118CrossRefGoogle Scholar
  15. Ruiz-Buforn A (2019) On the impact of public information in financial markets: an experimental approach (Doctoral dissertation, Universitat Jaume I, Castellón de la Plana, España). Retrieved from
  16. Ruiz-Buforn A, Alfarano S, Camacho-Cuena E, Morone A (2018) Crowding out effect and traders’ overreliance on public information in financial markets: a lesson from the lab. MPRA Paper 88866, University Library of Munich, GermanyGoogle Scholar
  17. Shiller R J (2002) Irrational exuberance in the media. The Right to Tell, p 83Google Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2019

Authors and Affiliations

  • Alba Ruiz-Buforn
    • 1
  • Simone Alfarano
    • 1
    Email author
  • Eva Camacho-Cuena
    • 1
  1. 1.Universitat Jaume ICastellón de la PlanaSpain

Personalised recommendations