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Gradual information diffusion model predicts that as private information travels across the population, pricing accuracy would improve and asset prices would exhibit momentum as a result. In laboratory markets I investigate the market’s aggregation capacity in response to varying proportions of informed traders as a consequence of information diffusion. The results demonstrate that pricing errors are high when private information is dispersed and that, as the information spreads, the market gradually revise the errors and manifest momentum. Analysis suggests that aggregation under dispersed information conditions is hampered by three factors: equilibrium multiplicity, slow arrival of myopic traders, and anonymous trading.


Working Paper 10-03



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