Experimental Asset Markets - Price Formation in the Presence of Ambiguity

Project Start:01/2019
Researchers:Wenhui Li, Peter Ockenfels, Christian Wilde
Category: Financial Markets, Experiment Center
Funded by:SAFE

Almost all real-world situations in financial markets involve ambiguity, since the probabilities of certain market outcomes are mostly unknown. We investigate how the presence of ambiguity affects the price formation in financial markets. In particular, we analyze the information transmission in financial markets in a dynamic setting where the level of ambiguity changes over time, e.g. due to the arrival of new information, and where agents are heterogeneous with different priors as well as different attitudes towards ambiguity. We investigate the learning process of individual investors about the true distribution based on fundamentals and analyze how different beliefs about the set of possible priors are aggregated in a market context and lead to different market outcomes. We also consider feedback effects between aggregated market information (prices etc.) and individual investor beliefs.


The project is a continuation of our previous SAFE projects "Experimental studies on ambiguity and ambiguity aversion", "Experimental asset markets – Regulation and design of fragmented markets", and "Financial interactions in the presence of ambiguity" that have resulted in one SAFE working paper and two additional working papers close to completion. We aim to conclude these projects, enhance them with an additional working paper on information transmission, and lead the working papers to publication.


In the previous projects, we have investigated attitudes towards ambiguity on the level of individual investors, price discounts due to ambiguity, and market price evolution in the presence of ambiguity.


The analysis is performed experimentally with asset market experiments run in the FLEX laboratory, applying different models of ambiguity in various settings.

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
251Wenhui Li, Christian WildeBelief Formation and Belief Updating under Ambiguity: Evidence from Experiments2019 Financial Markets, Experiment Center ambiguity, learning strategy, belief updates, non-Bayesian updates, pessimism, laboratory experiments