An experimental examination of the flow of irrelevant information across markets
Abstract
Our study uses an experimental method to provide insight into the flow of information across two asset markets that are fully segmented. In our asset markets, two separate sets of participants trade an identical asset in different markets. We then introduce a shock to fundamentals in one market to examine the response of traders in the second market. Because there is no fundamental shock in the second market, we can separate information-based reactions from responses due to changes in underlying fundamental values. With the separation across markets, we observe whether information relating to a fundamental shock that only affects the shocked market is transmitted to the non-shocked market. Our evidence suggests that traders in one market are observing behavior in the other contemporaneous market. After an information shock, price efficiency declines but improves by the end of trading.