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Experimentation in financial markets

Author: Massa, Massimo ; Simonov, AndreiINSEAD Area: FinanceIn: Management Science, vol. 55, no. 8, August 2009 Language: EnglishDescription: p. 1377-1390.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: In this paper, we use a unique data set on the Italian interdealer bond market to empirically estimate the process of strategic experimentation. The results show how the information generated in the process of interdealer trading affects the incentive to experiment. Upon receipt of an order, dealers deliberately engage in trade with other dealers either to exploit the information contained in the order they receive or, if they are uncertain about its quality, to assess it by actively experimenting with other dealers. We therefore identify “hiding” and “experimenting” as main types of dealer strategies.
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In this paper, we use a unique data set on the Italian interdealer bond market to empirically estimate the process of strategic experimentation. The results show how the information generated in the process of interdealer trading affects the incentive to experiment. Upon receipt of an order, dealers deliberately engage in trade with other dealers either to exploit the information contained in the order they receive or, if they are uncertain about its quality, to assess it by actively experimenting with other dealers. We therefore identify “hiding” and “experimenting” as main types of dealer strategies.

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