Published in The American Economic Review, Volume 95, Issue 3, June 1, 2005, pages 510-529. Copyright © 2005 American Economic Association. The definitive version is available at http://dx.doi.org/10.1257/0002828054201350.
NOTE: At the time of publication, the author Eric Fisher was not yet affiliated with Cal Poly.
We show that extrinsic or non-fundamental uncertainty influences markets in a controlled environment. This work provides the first direct evidence of sunspot equilibria. These equilibria require a common understanding of the semantics of the sunspot variable, and they appear to be sensitive to the flow of information. Extrinsic uncertainty matters when information flows slowly, as in a call market, but it need not matter when information flows quickly, as in a double auction where infra-marginal bids and offers are observable.