FINANCIAL-MARKETS WITH ASYMMETRIC INFORMATION - A PILOT-STUDY FOCUSING ON INSIDER ADVANTAGES

This paper develops a design for laboratory market experiments and dis cusses the results of a pilot investigation, Subjects could trade an a rtificial risky asset on a call market (double-sided sealed-bid, or ba tched, auction). The participants were divided in two groups: informed traders (who knew the asset's fundamental value) and uninformed trade rs (who could only observe the market price). The objective of the exp eriment was to study the extent to which insiders were able to exploit their advantage, and whether or not information is revealed through m arket prices. Participants' risk attitudes and initial endowment posit ions were analyzed with respect to their impact on investment decision s. We find that portfolio behavior is influenced by the initial endowm ent structure, whereas individual risk attitudes do not explain observ ed portfolio structures. As to the distribution of information, inside rs could partially exploit their advantage in terms of final portfolio values. Outsiders showed to be able to use the market price in order to infer information about the fundamental value.