Prices in experimental asset markets under uncertainty

Abstract

This paper presents an experiment which investigates whether asset prices are affected in markets where state probabilities are not exactly known and traders have to form subjective probabilities of payoffs. Results show that the presence of vague probabilities leads to higher average prices with respect to assets characterised by known probabilities. However, prices under known and vague probabilities draw closer when traders get a sounder understanding of how to arbitrate between markets.

Keywords:

• markets
• risk
• uncertainty
• prices
• arbitrage

Acknowledgements

The author thanks the editors and two anonymous referees for stimulating comments and criticism. Thanks are also due to Urs Fischbacher, David Grether, Anna Maffioletti, and participants in various seminars at which material drawn from this experiment has been presented. Benedetto Bruno and Sebastiano Scirè helped computerize and run the experiment.

Notes

1. Francs is the experimental currency used throughout the experiment.

2. Similarly, in the uncertain markets the certificate endowment was made up either of 1 Green and 5 Blues, or by 5 Blues and 1 Green.

3. Since there are four independent observations per treatment, two with risky and two with uncertain draws, t-tests cannot be used to compare mean prices under risk and uncertainty. The non-parametric Wilcoxon sign-rank test has been applied to test the one-tailed hypothesis that prices under ambiguity are stochastically larger than under risk. Considering the four pairs of sessions where no oral information is provided, the null hypothesis is rejected (both for periods 1–5 and 6–10: W = 24, p[W > 24] = 0.0571). When bundling is allowed, the null hypothesis cannot be rejected (periods 1–5: W = 22, p[W > 22] = 0.1714; periods 6–10: W = 21, p[W > 21] = 0.2429).