The first meeting of the WISE 2011 series will host one of our recent graduates, Gloria Gardenal, PhD.
On February 16, 2011 starting at 12.30 she will present her work on Cross-market Rebalancing and Financial Contagion in the Laboratory.
For a sneak peak of what she will present, here is the abstract of this work.
Abstract: We present an experimental study of financial contagion due to cross-market rebalancing. Subjects trade three assets with an automaton representing a fringe of noise traders. The three assets' fundamental values are independent of each other. Their payoff depends on the asset values, the prices at which they buy or sell and, moreover, on their portfolio composition. Theory predicts that when the first asset is hit by a negative shock, for portfolio rebalancing, subjects should buy in the second market and sell in the third, thus transmitting the shock from the first market to the third. The aggregate behavior that we observe in the laboratory is extremely close to that predicted by theory. Although in the experiment there is heterogeneity among subjects' behavior, the prices in the three markets are remarkably similar to those theoretically predicted.
The blog of the Wednesday Informal Seminar in Economics (WISE)