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Transaction costs and informational cascades in financial markets: theory and experimental evidence

Cipriani, M.; Guarino, A.; (2006) Transaction costs and informational cascades in financial markets: theory and experimental evidence. (ELSE Working Papers 206). ESRC Centre for Economic Learning and Social Evolution: London, UK. Green open access

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Abstract

We study the effect of transaction costs (e.g., a trading fee or a transaction tax, like the Tobin tax) on the aggregation of private information in financial markets. We analyze a financial market à la Glosten and Milgrom, in which informed and uninformed traders trade in sequence with a market maker. Traders have to pay a cost in order to trade. We show that, eventually, all informed traders decide not to trade, independently of their private information, i.e., an informational cascade occurs. We replicated our financial market in the laboratory. We found that, in the experiment, informational cascades occur when the theory suggests they should. Nevertheless, the ability of the price to aggregate private information is not significantly affected.

Type: Working / discussion paper
Title: Transaction costs and informational cascades in financial markets: theory and experimental evidence
Open access status: An open access version is available from UCL Discovery
Publisher version: http://else.econ.ucl.ac.uk/newweb/papers.php#2006
Language: English
Keywords: JEL classification: C92, D8, G14
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/14523
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