Experimental Economics 488

Commodity and Stock Markets Initial Experiment

Age and Experience in Both Markets

Final Outcome: Size Manipulation:

Small Markets = Commodities Large Markets = Stocks

The Question

Is information incorporated faster and more equitably in a small or large market?

Clarification

How we define “Faster” Periods are in terms of transaction

numbers and not seconds. Justification

Excludes initial confusion Compare similar observations - linear

relationship between average transactions Eliminates practical difficulties

Expected Outcomes Larger Market More Successful Than

Smaller Market Increased Competition - Breakdown of

Collusion More Information Available

By trading at a high volume, more information is discovered

Downside : Speculation of Price Traders with information benefit

Faster Convergence Leads to Minimized Losses

Instructions Market Information The experiment will consist of 16 rounds in total. One trial round

will precede the experiment, in order for participants to familiarize themselves with the program

Each participant is assigned a group, A or B. In odd rounds, both groups will be in the market, whereas in even rounds, groups A and B will alternate. Groups A and B are of equal size.

In each round, certain individuals will randomly have some knowledge of the actual value of the good, and other will not.

Participants will each be given 5 shares. In order to avoid any restrictions on trading, there will be an initial endowment of 10,000 given to each trader. He or she can trade as much or as little as desired but must not have a negative holding of shares at any point during the trading round

Participants know their values for each round ahead of time. This does not affect results as each round is independent.

If information is given, the tabs will contain a random number between 100 and 1000, otherwise they will say “no information”. The “noise” of the value given will constantly be 40. This means that if the value someone is given is 800, the true value of the good is between 760 and 840.

Instructions Cont. Trading Program. The trial round will allow each participant to familiarize

him or herself with the computer program being used in the B74 Lab. The Z-Tree program allows us to simulate the market. The program is run by one main computer and is connected to all other sub-computers. 

Participants will open the program and be directed to a “market” screen where trading will take place.

Traders can place a bidding price to purchase shares from other traders or they can place an offering price to sell their own shares. In order to take up a trader on his “bid” or “offer” other traders have to select “sell” and “buy” respectively.

No transactions will take place when the market is closed (i.e. when the time in the upper right hand corner runs out). At the end of each round, an updated screen with ending market conditions will be posted. Participants will be able to observe their total gains from trading in each round. A time-series graph will show real-time prices.

Data Analysis Speed

Visual - Graphic Representation of Periods Numerical - Measure of speed of conversion and

testing

Equality Profit per transaction Overall profit.

All these observations are comparisons between the larger (odd) and smaller (even) markets.

Graphs: Period 1 & 3Actual Value: 399

Ending Value: 424

Actual Value: 781

Ending Value: 780

Graphs: Period 5 & 7Actual Value: 648

Ending Value: 540

Actual Value: 484

Ending Value: 499

Graphs: Period 9 & 11Actual Value: 507

Ending Value: 450

Actual Value: 872

Ending Value: 700

Graphs: Period 2 and 4Actual Value: 694

Ending Value: 674

Actual Value: 348

Ending Value: 350

Graphs: Period 8 and 10Actual Value: 394

Ending Value: 408

Actual Value: 796

Ending Value: 360

Graph: Period 12 Actual Value: 363

Ending Value: 450

Speed of Convergence Observations:

Larger markets converge faster in terms of average transactions per person

Convergence: A series of consecutive transactions exists, such that individual transactions give a price within 10% of the actual value

Large Market Small Market

Round Convergence Per Participant Round Convergence Per Participant1 23 1.28 2 20 2.223 21 1.17 4 23 2.565 NA NA 8 12 1.337 13 0.72 10 NA NA9 14 0.78 12 NA NA

11 22 1.22      

Average 18.6 1.03 Average 18.3 2.04

Summary of Larger MarketsEquality

Summary of Smaller MarketsEquality

Small Markets

Round Transactions ΔTotal StDev Δ10 StDev Δ5 StDev

2 52 95.1 104.7 24.6 6.6 20.0 0.0

4 33 77.6 90.9 4.5 7.9 2.0 0.0

8 48 37.5 34.5 29.9 16.7 32.6 17.0

10 29 344.5 109.0 316.5 65.1 352.0 76.7

12 37 181.6 109.1 158.5 110.0 169.0 112.8

Average 39.8 147.3 89.6 106.8 41.3 115.1 41.3

Larger markets generate prices closer to the actual value

Equality (Overall Profits) Observations:

Equality and Profit distribution Faster convergence linked to fewer profits Profits distributed more equally in larger

markets Results not significant (observations and

outliers)Large Market Small Market

Round σ Round σ1 148.76 2 597.603 107.87 4 81.175 257.27 8 95.397 37.92 10 858.789 509.31 12 986.84

11 868.17    Average 321.55 Average 523.96

Limitations

Number of Rounds Time Constraint Personal Error in Data

Knowledge of Z-Tree Class Members versus Outside

Acquaintances Repeated usage of the program leads to

better execution of its functions Focus Issue

Participants may lose concentration after several rounds

Final Thoughts

Larger Markets are more equitable and converge faster than smaller markets

Possible Causes: Increased Competition in terms of people

with information More information available (more likely to

cause reactions) Separating Equality from Speed

Though highly linked, “faster” does not guarantee “more equitably”