A simultaneous equations analysis of analysts’ forecast bias and institutional ownership

In this paper we use a simultaneous equations model to examine the relationship between analysts' forecasting decisions and institutions' investment decisions. Neglecting their interaction results in model misspecification. We find that analysts' optimism concerning a firm's earnings responds positively to changes in the number of institutions holding the firm's stock. At the same time, institutional demand responds positively to increases in analysts' optimism. We also investigate several firm characteristics as determinants of analysts' and institutions' decisions. We conclude that agency-driven behavioral considerations are significant.Financial institutions ; Forecasting ; Financial markets

The effects of subject pool and design experience on rationality in experimental asset markets

Empirical evidence suggests that prices do not always reflect fundamental values and individual behavior is often inconsistent with rational expectations theory. We report the results of fourteen experimental markets designed to examine whether the interactive effect of subject pool and design experience tempers price bubbles and improves forecasting ability. Our main findings are: (i) price run-ups are modest and dissipate quickly when traders are knowledgeable about financial markets and have design experience; (ii) price bubbles moderate quickly when only a subset of traders are knowledgeable and experienced; and (iii) individual forecasts of price are not consistent with the predictions of the rational expectations model in any market.Financial markets

Time-varying volatility in Canadian and U.S. stock index and index futures markets: A multivariate analysis

We use a multivariate generalized autoregressive heteroskedasticity model (M-GARCH) to examine three stock indexes and their associated futures prices: the New York Stock Exchange Composite, Standard and Poor's 500, and Toronto 35. The North American context is significant because markets in Canada and the United States share similar structures and regulatory environments. Our model allows examination of dependence in volatility as it captures time variation in volatility and cross-market influences. Estimated time-variation in volatility is significant, and the volatilities are highly positively correlated. Yet, we find that the correlation in North American index and futures markets has declined over time.Financial markets ; Futures ; Stock market

Cooperating to Resist Coercion: An Experimental Study

This study sheds light on the difficulties people face in cooperating to resist coercion. We adapt a threshold public goods game to investigate whether people are able to cooperate to resist coercion despite individual incentives to free-ride. Behavior in this resistance game is similar to that observed in multi-period public goods games. Specifically, we observe "out-of-equilibrium" outcomes and a decrease in successful resistance in later periods of a session compared to earlier ones. Nevertheless, cooperation remains relatively high even in the later periods. Finally, we find that increasing the resistance threshold has a substantial negative effect on the probability of successful resistance.

Bubbles in experimental asset markets: Irrational exuberance no more

The robustness of bubbles and crashes in markets for finitely lived assets is perplexing. This paper reports the results of experimental asset markets in which participants trade two assets. In some markets, price bubbles form. In these markets, traders will pay even higher prices for the asset with lottery characteristics, i.e., a claim on a large, unlikely payoff. However, institutional design has a significant impact on deviations in prices from fundamental values, particularly for an asset with lottery characteristics. Price run-ups and crashes are moderated when traders finance purchases of the assets themselves and are allowed to short sell.Financial markets ; Risk

Uncertain litigation cost and seller behavior: Evidence from an auditing game

This paper reports the results of two experiments, each consisting of six sessions, designed to investigate difficulties that arise in estimating expected litigation costs in an auditing game. In each experimental session, the game consists of a series of periods in which sellers submit sealed offers to computerized buyers and, if hired, choose an effort level (low or high). The effort level affects the certain (direct) and uncertain (litigation) costs of performing the engagement. Across the two experiments, we vary the uncertainty surrounding the determination of the expected litigation cost. Our results strongly suggest that cognitive limitations hinder sellers' abilities to estimate total expected litigation costs. Across both experiments we observe a nontrivial number of suboptimal effort choices. Moreover, as the uncertainty of determining the expected litigation cost increases, the frequency of observed fee offers below the total expected cost of an engagement increases markedly.Accounting

Voluntary disclosure under imperfect competition: Experimental evidence

This study investigates disclosure behavior when a manager has incentives to influence the actions of a product market competitor in a Cournot duopoly. Theoretical research suggests that under various conditions the manager has incentives to withhold some signals and disclose others. Using an experimental economics method, we find support for partial information disclosure. Our results suggest that when the manager receives private information about industrywide cost, unfavorable (favorable) information is disclosed (withheld) and the competitor adjusts production accordingly. In contrast, when the manager receives private information about firm-specific cost, disclosure behavior is not affected by the favorableness of the information and the competitor's production decision is invariant to the disclosure choice.Information theory ; Microeconomics

An experimental study of circuit breakers: the effects of mandated market closures and temporary halts on market behavior

This paper analyzes the effect of circuit breakers on price behavior, trading volume, and profit-making ability in a market setting. We conduct nine experimental asset markets to compare behavior across three regulatory regimes: market closure, temporary halt, and no interruption. The presence of a circuit breaker rule does not affect the magnitude of the absolute deviation in price from fundamental value or trading profit. The primary driver of behavior is information asymmetry in the market. By comparison, trading activity is significantly affected by the presence of a circuit breaker. Mandated market closures cause market participants to advance trades.Financial markets ; Flow of funds ; Stock market

Social Distance and Reciprocity

Contrary to the predictions of non-cooperative game theory, trust and reciprocity are commonly reported in simple games. We conduct a one-shot investment game to examine how social distance affects behavior in two-person exchanges. Two aspects of social distance are examined: ex post revelation of complete information on the second playerâ??s choice set and ex post revelation of information regarding the second playerâ??s identity. The results indicate that reciprocity is not affected by knowledge of the choice set, but depends critically on the possible revelation of the decision makerâ??s identity. That is, the possibility that the second playerâ??s identity (picture) is revealed to his/her counterpart has a profound effect on the degree of reciprocity extended.

Circuit breakers with uncertainty about the presence of informed agents: I know what you know . . . I think

This study conducts experimental asset markets to examine the effects of circuit breaker rules on market behavior when agents are uncertain about the presence of private information. Our results unequivocally indicate that circuit breakers fail to temper unwarranted price movements in periods without private information. Agents appear to mistakenly infer that others possess private information, causing price to move away from fundamental value. Allocative efficiencies in our markets are high across all regimes. Circuit breakers perform no useful function in our experimental asset markets.Markets ; Financial markets ; Risk