An Experimental Study of Bond Market Pricing

Tinbergen Institute Discussion Paper 16-059/I

50 Pages Posted: 10 Aug 2016

See all articles by Matthias Weber

Matthias Weber

University of St. Gallen - School of Finance

John Duffy

University of California, Irvine

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

Date Written: August 9, 2016

Abstract

An important feature of bond markets is the relationship between initial public offering prices and the probability of the issuer defaulting. First, this probability affects the bond prices. Second, IPO prices determine the default probability. Though market equilibrium has been shown to predict well for other assets, it is a priori unclear whether markets will yield competitive prices when such interaction with the default probability occurs. We develop a flexible bond market model that is easily implemented in the laboratory and examine how subjects price bonds. We find that subjects learn to price bonds well after only a few repetitions.

Keywords: bond markets, experimental finance, experimental markets, asset pricing, learning

JEL Classification: C92, C90, D47, G12

Suggested Citation

Weber, Matthias and Duffy, John and Schram, Arthur J. H. C., An Experimental Study of Bond Market Pricing (August 9, 2016). Tinbergen Institute Discussion Paper 16-059/I, Available at SSRN: https://ssrn.com/abstract=2820532 or http://dx.doi.org/10.2139/ssrn.2820532

Matthias Weber (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Arthur J. H. C. Schram

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 18
CREED
Amsterdam 1018 WB
Netherlands
+31 (0)20 525 4293 (Phone)

HOME PAGE: http://www.fee.uva.nl/creed/PEOPLE/Arthurs.htm

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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