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Futures Markets and Informational Efficiency: A Laboratory Examination

Authors

  • ROBERT FORSYTHE,

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    • The University of Iowa, Carnegie-Mellon University, and California Institute of Technology, respectively. Earlier versions of these results were presented at the Western Economic Association meeting in San Diego in June 1980 and at the World Congress meetings in Aix-en-Provence, France in September 1980. We thank those audiences for useful comments and discussion. We would also like to thank Forrest D. Nelson for his helpful suggestions.

  • THOMAS R. PALFREY,

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    • The University of Iowa, Carnegie-Mellon University, and California Institute of Technology, respectively. Earlier versions of these results were presented at the Western Economic Association meeting in San Diego in June 1980 and at the World Congress meetings in Aix-en-Provence, France in September 1980. We thank those audiences for useful comments and discussion. We would also like to thank Forrest D. Nelson for his helpful suggestions.

  • CHARLES R. PLOTT

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    • The University of Iowa, Carnegie-Mellon University, and California Institute of Technology, respectively. Earlier versions of these results were presented at the Western Economic Association meeting in San Diego in June 1980 and at the World Congress meetings in Aix-en-Provence, France in September 1980. We thank those audiences for useful comments and discussion. We would also like to thank Forrest D. Nelson for his helpful suggestions.


ABSTRACT

Through the use of laboratory market methodology, the effect of a futures market on the time path of asset prices is studied and competing models of asset pricing are analyzed. With replication of market conditions, the predictions of a rational expectations equilibrium model are relatively accurate whether or not futures markets are present. However, the presence of futures markets increases the speed with which an efficient equilibrium is achieved. While this more rapid adjustment can increase the variance of spot market prices as they move to equilibrium, this increased variance reflects efficiency gains due to better information.

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