ICES Seminar in Experimental Economics and Game Theory

How Does Passive Investing Effect the Informational Efficiency of Prices?

Friday, March 1, 2024 12:00 PM to 1:00 PM EST
Vernon Smith Hall (formerly Metropolitan Building), 5183

ICES Seminar in Experimental Economics and Game Theory

 

The ICES Seminar in Experimental Economics and Game Theory of the Spring 2024 semester will feature:

Jason Shachat

Durham University

How Does Passive Investing Effect the Informational Efficiency of Prices?

 

 

Abstract

We develop a novel experimental paradigm aimed at investigating the causal effects of passive investing on informational efficiency and market quality metrics. Our study finds that, while improving liquidity, passive trading hurts informational efficiency, confirming our main hypothesis. Furthermore, we observe violations of the law of one price, leading to widespread arbitrage opportunities that persisted for over half of the market's duration, even when passive trading constituted less than 20% of the market activity. Additionally, our research uncovers that Active traders, particularly those with private information about asset values and high cognitive ability, reap benefits from the introduction of passive trading.

 

For more information about the Seminar Series, please visit the Seminar Schedule homepage.

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