The paper ‘An Experimental Study of Bond Market Pricing‘ by fellow Arthur Schram (University of Amsterdam), TI alumnus Mathias Weber (Bank of Lithuania), and John Duffy (University of California, Irvine, United States) is forthcoming in the Journal of Finance.
An important feature of bond markets is the relationship between the IPO price and the probability that the issuer defaults. On the one hand, the default probability affects the IPO price. On the other hand, IPO prices affect the default probability. It is a priori unclear whether agents can competitively price such assets and our paper is the first to
explore this question. We do so using laboratory experiments. We develop two flexible bond market models that are easily implemented in the laboratory. We find that subjects learn to price the bonds well after only a few repetitions.
JEL Classification: C92, C90, G12, D47