ABSTRACT
In this chapter, the authors continue their study of the relationship between arbitrage and information aggregation in experimental stock and options markets. They examine the informational implications of zero arbitrage. The authors show that if the set of securities is sufficiently rich, then the only prices for which no trader can perceive an arbitrage opportunity based on his/her private information are the full information prices. They describe the different choices: the authors choose separating portfolios such that both the separating portfolios for a given state involve the same option; if possible, the authors choose portfolios involving the call option. The authors restrict attention to the second-period data for stock 1 and the options, since there is a complete set of markets for stock 1 in period 2, and it is relatively simple to construct and illustrate the appropriate portfolios. The authors ignore those parts of the data which do not contribute to the analysis of liquidity and persistence.
