When Do Security Markets Aggregate Dispersed Information?
Brice Corgnet, Cary Deck, Mark DeSantis, Kyle Hampton, Erik O. Kimbrough
Management Science · 2023 · Volume 69 · Issue 6
Abstract
We attempt to replicate a seminal paper that offered support for the rational expectations hypothesis and reported evidence that markets with certain features aggregate dispersed information. The original results are based on only a few observations, and our attempt to replicate the key findings with an appropriately powered experiment largely fails. The resulting poststudy probability that market performance is better described by rational expectations than the prior information (Walrasian) model under the conditions specified in the original paper is very low. As a result of our failure to replicate, we investigate an alternate set of market features that combines aspects of the original experimental design. For these markets, which include both contingent claims and homogeneous dividend payments (as in many prediction markets), we do find robust evidence of information aggregation in support of the rational expectations model. In total, our results indicate that information aggregation in asset markets is fragile and should only be expected in limited circumstances. This paper was accepted by Bruno Biais, finance. Supplemental Material: The data and online appendix are available at https://doi.org/10.1287/mnsc.2022.4463 .
Keywords
information aggregation, efficient markets, rational expectations, replication
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