Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120793
Authors: 
Cipriani, Marco
Guarino, Antonio
Guazzarotti, Giovanni
Tagliati, Federico
Fischer, Sven
Year of Publication: 
2015
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 715
Abstract: 
We study the informational channel of financial contagion in the laboratory. In our experiment, two markets with correlated fundamentals open sequentially. In both markets, subjects receive private information. Subjects in the market opening second also observe the history of trades and prices in the first market. We find that although in both markets private information is only imperfectly aggregated, subjects are able to make correct inferences based on the public information coming from the market that opens first. As a result, we observe financial contagion in the laboratory: Indeed, the correlation between asset prices is very close to that predicted by the theory. Finally, as theory predicts, there is no contagion when asset fundamentals are independent: That is, subjects only react to the history of prices and trades in the first market when it is rational to do so because they convey information.
Subjects: 
information contagion
laboratory experiment
equity premium
stock returns
JEL: 
C92
G01
G14
G15
Document Type: 
Working Paper

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