Information Ambiguity, Market Institutions and Asset Prices: Experimental Evidence

Abstract

We explore how information ambiguity and traders’ attitudes toward ambiguity affect expectations and asset prices under three different market institutions. Specifically, we test the prediction of Epstein and Schneider (2008) that information ambiguity will lead market prices to overreact to bad news and to underreact to good news. We find that such an asymmetric reaction exists and is strongest in individual prediction markets. It occurs to a lesser extent in single price call markets. It is weakest of all in double auction markets, where buyers’ asymmetric reaction to good/bad news is cancelled out by the opposite asymmetric reaction of sellers.

Keywords: Ambiguity Aversion, Information ambiguity, Asset Bubbles, Experimental Finance, Signal Extraction

JEL Classification: C91, C92, D82, G12, G40