A Future Market Reduces Bubbles but Allows Greater Profit for More Sophisticated Traders

C.N. Noussair, S. Tucker, Yilong Xu

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We study the effect of the addition of a futures market, in which contracts maturing in the last period of the life of the asset can be traded. Our experiment has two treatments, one in which a spot market operates on its own, and a second treatment in which a spot and futures market are active simultaneously. We find that the futures market reduces spot market mispricing among a trader population prone to bubbles, while having no effect on pricing in a group not prone to it. Thus, overall, futures markets aid price discovery in the spot market, although the futures markets themselves exhibit considerable overpricing. Individuals with higher cognitive reflection test (CRT) scores achieve greater earnings, as they tend to sell in the overpriced futures market,
while traders with lower CRT score make purchases in the futures market. We also consider the predictive power of an enhanced CRT measure (ECRT), which weights two types of incorrect answers differently .
Original languageEnglish
Place of PublicationTilburg
Number of pages36
Publication statusPublished - 2 Sept 2014

Publication series

NameCentER Discussion Paper


  • asset market experiment
  • market institution
  • futures market


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