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Risk-Taking and Tail Events Across Trading Institutions

Author

Listed:
  • Brice Corgnet

    (EM - EMLyon Business School)

  • Camille Cornand

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

  • Nobuyuki Hanaki

    (Osaka University [Osaka])

Abstract
We study the reaction of investors to tail events across trading institutions. We conduct experiments in which investors bid on a financial asset that delivers a small positive reward in more than 99% of the cases and a large loss otherwise. The baseline treatment uses a repeated BDM mechanism whereas the market treatment replaces the uniform draw of the BDM mechanism by a uniform draw over the bids of the other participants. Our design is such that bids should not differ across treatments in normal times while allowing for potential differences to emerge after tail events have occurred. We find that markets tend to exacerbate the reaction of investors to tail losses and we attribute this effect to emotions.

Suggested Citation

  • Brice Corgnet & Camille Cornand & Nobuyuki Hanaki, 2021. "Risk-Taking and Tail Events Across Trading Institutions," Working Papers halshs-03357898, HAL.
    • Handle: RePEc:hal:wpaper:halshs-03357898
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    References listed on IDEAS

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    1. Weber, Matthias & Duffy, John & Schram, Arthur, 2024. "Regulation and the demand for credit default swaps in experimental bond markets," European Economic Review, Elsevier, vol. 165(C).

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    Keywords

    Tail events; trading institutions; experimental finance; emotions and risk;
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