What drives information dissemination in continuous double auction markets?

In this paper, we investigate further the way information disseminates from informed to uninformed traders in a market populated by heterogeneous boundedly rational agents. In order to achieve the goal, a computer simulated market where only a small fraction of the population observe the risky asset´s fundamental value with noise was constructed, while the rest of agents try to forecast the asset´s price from past transaction data. The paper departs from previous studies in that the risky asset does not pay a dividend every period, so agents cannot learn from past transaction prices and subsequent dividend payments. The main finding is that information can potentially disseminate in the market as long as: (1) informed investors´ trades tilt transaction prices in the fundamental path direction; and (2) the median investor´s expectation is very responsive to transaction prices. Otherwise, markets may display crashes or bubbles. It is found that the first condition requires a minimal amount of informed investors, and is severely limited by short selling and borrowing constraints.