Transaction costs and informational cascades in financial markets: Theory and experimental evidence.

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 736

Classification and Topics

• Classification: Wirtschaft ; Design of Experiments: Laboratory, Group Behavior ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: Herd Behavior ; Informational Cascades ; Tobin Tax ; Trade Costs ; Finanzmarkt ; Transaktionskosten ; Herdenverhalten ; Asymmetrische Information

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cipriani, Marco ; Guarino, Antonio
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/153170
• Last update: 10.03.2025, 11:42 AM CET