Information Ambiguity, Market Institutions, and Asset Prices: Experimental Evidence

Abstract

We explore how information ambiguity and traders’ attitudes toward such ambiguity affect expectations and asset prices under three different market institutions. Specifically, we test a theoretical prediction that information ambiguity will lead market prices to overreact to bad news and underreact to good news. We find that such an asymmetric reaction exists and is strongest in individual prediction markets. It occurs to a lesser extent in single price call markets. It is weakest of all in double auction markets, in which buyers’ asymmetric reaction to good/bad news is cancelled out by the opposite asymmetric reaction of sellers. This paper was accepted by Camelia Kuhnen, finance. Funding: Financial support from a Tier 1 Grant from MOE of Singapore [Grant RG 69/19], NTU-WeBank JRC [Grant NWJ-2020-003], the National Natural Science Foundation of China [Grants 72303170, 72141304], and the National Key Research and Development Program of China [Grant 2022YFC3303304] is gratefully acknowledged. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01223 .