Trading Complex Assets

Authors

  • BRUCE IAN CARLIN,

  • SHIMON KOGAN,

  • RICHARD LOWERY

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    • Carlin is from the Anderson School of Management, University of California, Los Angeles. Kogan and Lowery are from the McCombs School of Business, University of Texas at Austin. We would like to thank Kim Donghyun for excellent research assistance and finance seminar participants at the Australian National University, Hebrew University, Melbourne University, Michigan State University, University of New South Wales, University of Queensland, University of Sydney, Tel Aviv University, University of Texas at Austin, and the 2010 Miami Behavioral Finance Conference for their comments and suggestions.


ABSTRACT

We perform an experimental study to assess the effect of complexity on asset trading. We find that higher complexity leads to increased price volatility, lower liquidity, and decreased trade efficiency especially when repeated bargaining takes place. However, the channel through which complexity acts is not simply due to the added noise induced by estimation error. Rather, complexity alters the bidding strategies used by traders, making them less inclined to trade, even when we control for estimation error across treatments. As such, it appears that adverse selection plays an important role in explaining the trading abnormalities caused by complexity.

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