On the impact of public information in financial markets: an experimental approach

Abstract

The debate on the limits of transparency'' of the central banks' communication policy is the inspiration of the present thesis. Specifically, this thesis investigates whether it exists an optimal level of information transparency that the central bank can target in order to manage the economic agents' expectations without dominating the evolution of financial markets. In this regard, laboratory methods are used to evaluate the impact of disclosing public information on the price informativeness. The experimental design is based on an Arrow-Debreu asset market where traders have access to imperfect private information about the asset value. The primary research question is whether the disclosure of public information improves or impairs informational efficiency. Together with beneficial effects, the complex interaction between private and public information leads to detrimental and unintended consequences for market performance. Releasing public information might crowd out private information demand. Furthermore, public information is overweighted beyond its informational content on fundamentals. This overweighting phenomenon is linked to the asymmetric impact of the public information on higher-order beliefs of bounded rational traders.