Chapter 4 Experimental Random Arrival Markets with Competing Insiders
4.4 Results
4.4.3 Inventories
A fundamental question regarding auctions with asymmetric information has been whether markets diffuse information. That is, do non-insiders learn the
information held by insiders as trading evolves.
One way to answer this question is to compare the market activities of insiders and uninformed traders in terms of inventories. Since uninformed traders, trading solely on the basis of their private incentives, have no reason other than information learned from insiders to accumulate positive or negative levels of inventory. While the inventory levels of uninformed traders may fluctuate, they have no reason to trend over time.
Therefore, any trend in non-insider inventories can be attributed to information flow between insiders and outsiders.
Result 3: The inventory buildup of uninformed traders mirrors the inventory buildup of insiders.
Figures 4.4 and 4.5 show the aggregate and average levels of inventories per trader for both insiders and uninformed agents. Outsiders’ inventories tend to trend with insiders. In nearly every period, uninformed traders accumulate non-zero inventory levels in the same direction as informed traders. The level of inventory per trader is typically less than the level of inventory per informed trader, but the level of inventory buildup on the part of uninformed traders does occasionally exceed that of informed subjects. This can be clearly seen in 080727 period 4 in which nearly all of the
speculation during the first half of the experiment is accounted for by outsiders.
Figure 4.4: All Experiments and Inventories
0 0.5 1 1.5 2 2.5
x 104 0
100 200 300 400 500 600 700 800
Price
Time
0 0.5 1 1.5 2 2.5
x 104 -200
-150 -100 -50 0 50 100 150 200
Time
Inventory
Traded Price FCE Price Full Information Price
Insiders Uninformed
Figure 4.5: All Experiments and Inventories per Trader
In Section 4.3.1 we show how uninformed agents can infer the total signed rate of speculation in a market by comparing the rate of trade at current market prices to the
“natural rate of trade,” the rate at which trade would ordinarily proceed, at that price, in the absence of insiders.
To test this theory, we divide each experiment into thirty-second intervals. For each interval, we measure the average change in inventory per trader for both insiders and uninformed traders and the FIP and FCE price at the beginning of the interval. We then regress the rate of inventory accumulation per thirty seconds on a single lag of inventory accumulation rates, as well as dummy variables indicating whether the FCE price is less than or greater than the FIP at the beginning of the interval.
0 0.5 1 1.5 2 2.5
x 104 0
100 200 300 400 500 600 700 800
Price
Time
Traded Price FCE Price Full Information Price
0 0.5 1 1.5 2 2.5
x 104 -40
-30 -20 -10 0 10 20 30
Time
Inventory per Trader
Insiders Uninformed
Hypothesis 3: The inventory accumulation rate of non-insiders will depend on the lagged total rate of inventory accumulation.
Hypothesis 4: Insiders inventory accumulation rate will be driven by the location of FCE relative to the FIP.
Hypothesis 5: Competition for information rents will also affect insiders’
inventory accumulation decisions, reflected in a significantly positive slope coefficient on the lagged total rate of inventory accumulation.
Result 4: Uninformed traders use the observed rate of trade to speculate on the direction of the Full Information Price, but never learn either the identities of the insiders or the true location of the Full Information Price.
Table 4.4 summarizes the results for uninformed traders. A t-test of the hypothesis that the coefficients on lagged rate of inventory accumulation per
uninformed trader and lagged rate of inventory accumulation per informed trader are equal fails to reject the null hypothesis at the 90% confidence level. This means that while uninformed traders are about to speculate on the direction of the FIP based on the total rate of speculation in the market, they are unable to identify exactly how much speculation is due to insiders and how much is due to other uninformed subjects.
Interestingly, conditional on the total rate of speculation, outsiders’ inventory accumulation does not depend at all on the relative location of the FCE to the FIP. This means that despite the ability of uninformed agents to profit off the observed rate of speculation, they never actually learn the true FIP. An implication of this is that these
markets are likely to be subject to informational mirages and bubbles (see (Camerer &
Weigelt, 1991), (Oechssler, Schmidt, & Schnedler, 2007)). Such a situation can occur in which uninformed traders rationally respond to market information which might possibly contain information about the state of the world, but which in actuality does not.
Table 4.4: Inventory Accumulation Rate of Uninformed Traders
Variable Coefficient
Lagged Rate of Inventory Accumulation per
Uninformed Trader 0.08**
Lagged Rate of Inventory Accumulation per
Informed Trader 0.10**
FCE<FIP Dummy 0.18
FCE>FIP Dummy -0.14
Constant -0.03
R2 0.13
* p<.1, ** p<.05, *** p<.01
Result 5: Hypothesis 4 is correct. The aggregate rate of insiders depends on location of the FCE price relative to the FIP. When the FCE is below the FIP, insider have a positive rate of inventory accumulation. When it is above the FIP, insiders have a negative, rate of inventory accumulation.
Result 6: Insiders are also affected by competition, accelerating their rate of inventory accumulation in direct response to past rates of
accumulation.
The results for insiders are listed in Table 4.5. The effect of competition from both insiders and uninformed traders is much higher for insiders than it is for outsiders.
For every ten units accumulated per thirty second interval, informed traders tend to
increase their rate of speculation as a whole by about 3 to 6 additional units in the next thirty second interval.
Over all experiments, insiders tended to over accumulate inventory during periods of low FCE prices and under sell inventory during periods of high FCE. This is reflected in the slope coefficients FCE<FIP Dummy and FCE>FIP Dummy not summing to zero, although both estimates are in the direction predicted by theory.
Table 4.5: Inventory Accumulation Rate of Uniformed Traders
Variable Coefficient
Lagged Rate of Inventory Accumulation per
Uninformed Trader 0.30***
Lagged Rate of Inventory Accumulation per
Informed Trader 0.58***
FCE<FIP Dummy 0.21**
FCE>FIP Dummy -0.11*
Constant -0.01
R2 0.57
* p<.1, ** p<.05, *** p<.01