Digital Options and Efficiency in Experimental Asset Markets

Stefan Palan (1)

1 Universitaetsstrasse 15/F2

In asset markets, extraordinary price run-ups (bubbles) followed by crashes back to levels closer to fundamental values have been shown to adversely affect the real economy, leading to inefficient resource allocation and underinvestment. Conversely, derivative markets contribute to price discovery and lead to informationally more efficient prices in the market for the underlying asset. We combine these observations and test experimentally whether digital options - a type of derivative that has recently been introduced to a wider audience via online prediction markets - can reduce price bubbles in a laboratory setting. We find that subjects do not use the derivative market to improve their expectations of future asset prices and analyze this result.

Mots clés: Asset market; digital option; experimental economics; bubble; efficiency

Domaines: Économie et finance quantitative [q-fin]

Stefan Palan. Digital Options and Efficiency in Experimental Asset Markets. Journal of Economic Behavior and Organization, 2010, 75 (3), pp.506. ⟨10.1016/j.jebo.2010.05.011⟩. ⟨hal-00849410⟩