Equilibrium Bid-Price Dispersion

44 Pages Posted: 8 Jul 2014 Last revised: 7 Dec 2019

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute

Date Written: December 6, 2019

Abstract

If bidding in a common-value auction is costly and if bidders do not know how many others are also bidding, all equilibria are in mixed strategies. Participation is probabilistic and bid prices are dispersed. The symmetric equilibrium is unique and yields simple analytic expressions. We use them to, for example, show that bid prices exhibit negative skew. The expressions are further used to estimate the model based on bidding in an S&P500 security. We find that the number of bidders declined over time, making liquidity supply fragile. A similar trend emerges when zooming in on the Flash Crash.

Suggested Citation

Jovanovic, Boyan and Menkveld, Albert J., Equilibrium Bid-Price Dispersion (December 6, 2019). Available at SSRN: https://ssrn.com/abstract=2463066 or http://dx.doi.org/10.2139/ssrn.2463066

Boyan Jovanovic

New York University - Department of Economics ( email )

19 w 4 st.
New York, NY 10012
United States

Albert J. Menkveld (Contact Author)

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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