Abstract

http://ssrn.com/abstract=2463425
 
 

Citations (2)



 


 



Price Discovery


Mark Satterthwaite


Northwestern University - Kellogg School of Management

Steven R. Williams


University of Illinois at Urbana-Champaign - Department of Economics

Konstantinos E. Zachariadis


London School of Economics

July 7, 2014


Abstract:     
We investigate equilibrium in the buyer's bid double auction (BBDA) in a model with correlated, interdependent values. Using a combination of theorems and numerical experiments, we establish that simple offset equilibria exist even in small markets. Moreover, we bound traders' strategic behavior as a function of market size and derive rates of convergence to zero of (i) inefficiency in the allocation caused by strategic behavior and (ii) the error in the market price as an estimate of the rational expectations price. These rates together with numerical experiments suggest that strategic behavior is inconsequential even in small markets in its effect on allocational efficiency and information aggregation. The BBDA thus simultaneously accomplishes both the informational and allocational goals that markets ideally fulfill. It does this perfectly for large markets and noisily for small markets, with the noise attributable mainly to the smallness itself and not the strategic behavior of traders.

Number of Pages in PDF File: 80

Keywords: double auction, rational expectations, allocational efficiency, information aggregation, computation of equilibria

JEL Classification: C62, C63, C72, D44, D82, D83

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Date posted: July 10, 2014  

Suggested Citation

Satterthwaite, Mark and Williams, Steven R. and Zachariadis, Konstantinos E., Price Discovery (July 7, 2014). Available at SSRN: http://ssrn.com/abstract=2463425 or http://dx.doi.org/10.2139/ssrn.2463425

Contact Information

Mark A. Satterthwaite
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Steven R. Williams
University of Illinois at Urbana-Champaign - Department of Economics ( email )
410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States
217-333-4516 (Phone)
Konstantinos E. Zachariadis (Contact Author)
London School of Economics ( email )
Houghton St
Department of Finance
London, WC2A 2AE
United Kingdom
+442079556541 (Phone)
+442078494647 (Fax)
HOME PAGE: http://www2.lse.ac.uk/finance/people/profiles/KostasZachariadis.aspx
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