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Quotes, Prices, and Estimates in a Laboratory Market
Author(s) -
BLOOMFIELD ROBERT
Publication year - 1996
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1996.tb05226.x
Subject(s) - extant taxon , skepticism , financial economics , adverse selection , set (abstract data type) , control (management) , economics , market microstructure , business , microeconomics , finance , order (exchange) , management , philosophy , epistemology , evolutionary biology , computer science , programming language , biology
This study examines the behavior of laboratory markets in which two uninformed market makers compete to trade with heterogeneously informed investors. The data provide three main results. First, market makers set quotes to protect against adverse selection and to control inventory. Second, when investors are less well‐informed, their trades are less reliable measures of their information, and market makers respond to those trades with greater skepticism. Third, errors in market makers' reactions to trades cause the time‐series behavior of quotes and prices to depend on the information environment in ways beyond those captured in extant theory.