Liquidity Changes Following Stock Splits
Published: 03/01/1979 | DOI: 10.1111/j.1540-6261.1979.tb02075.x
THOMAS E. COPELAND
The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study
Published: 07/01/1987 | DOI: 10.1111/j.1540-6261.1987.tb04585.x
THOMAS E. COPELAND, DANIEL FRIEDMAN
A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (ie., asset allocation), and bid‐ask spreads. In this paper, these variables are observed in a controlled setting—a computerized double auction market, similar to NASDAQ. Our laboratory allows experimental control of information arrival—whether simultaneously or sequentially received, and whether homogeneous or heterogeneous. We compare the price, volume, and share allocations of three market equilibrium models: telepathic rational expectations, which assumes that traders can read each others minds (strong‐form market efficiency); ordinary rational expectations, which assumes traders can use (some) market price information, (a type of semi‐strong form efficiency); and private information, where traders use no market information. We conclude 1) that stronger‐form market models predict equilibrium prices better than weaker‐form models, 2) that there were fewer misallocation forecasts in simultaneous information arrival (SIM) environments, 3) that trading volume was significantly higher in SIM environments, 4) and that bid‐ask spreads widen significantly when traders are exposed to price uncertainty resulting from information heterogeneity.
Information Effects on the Bid‐Ask Spread
Published: 12/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb03834.x
THOMAS E. COPELAND, DAN GALAI
An individual who chooses to serve as a market‐maker is assumed to optimize his position by setting a bid‐ask spread which maximizes the difference between expected revenues received from liquidity‐motivated traders and expected losses to information‐motivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information‐motivated trader, it is shown that the bid‐ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid‐ask spread proposed in this paper is consistent with the empirical literature.
Partial Revelation of Information in Experimental Asset Markets
Published: 03/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb03752.x
THOMAS E. COPELAND, DANIEL FRIEDMAN
We develop a model of market efficiency assuming private information is partially revealed to uninformed traders via the behavior of those who are informed. This partial revelation of information (PRE) model is tested in fourteen computerized double auction laboratory markets. It explains the market value and allocation of purchased information, and asset allocations, better than either a fully revealing information model (FRE strong‐form efficiency) or a nonrevealing expectations model; but it takes second place to FRE in explaining asset prices. We conjecture that refined versions of PRE may provide insight into “technical analysis” and minibubbles in securities markets.