Informed and Uninformed Trading with Correlated Assets: An Experimental Study
31 Pages Posted: 21 Sep 2016
Date Written: January 20, 2016
Abstract
We examine the use of market and limit orders by informed and uninformed traders in an experimental market with two correlated assets. Some traders receive private information about one asset, referred to as the main asset, which conveys information about the value of another asset, referred to as the substitute. A continuous flow of information allows uninformed traders to form expectations about the liquidation value of each asset throughout a trading session. When dealing in the main asset, we find that informed traders’ submission rate is relatively constant over time while their taking rate has a U-shape. With the substitute, insiders’ submission and taking rates follow a similar evolution as those of the uninformed traders. Insiders realize greater profits with the substitute than with the main asset, and realize their biggest gains when insider trading is prohibited in the main asset. Hence substitute trading can be highly profitable to an insider.
Keywords: Experiment; Insider Trading; Substitute Trading
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