Price Discovery Using a Double Auction

75 Pages Posted: 10 Jul 2014 Last revised: 3 Jun 2015

Mark Satterthwaite

Northwestern University - Kellogg School of Management

Steven R. Williams

University of Illinois at Urbana-Champaign - Department of Economics

Konstantinos E. Zachariadis

School of Economics and Finance, Queen Mary University of London

Date Written: June 2, 2015

Abstract

We investigate equilibrium in the buyer's bid double auction (BBDA) in a model with correlated signals and either private or interdependent values. Using a combination of theorems and numerical experiments, we demonstrate that simple 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 in large markets and approximately in small markets, with the error attributable mainly to the smallness itself and not the strategic behavior of traders.

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

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

Suggested Citation

Satterthwaite, Mark and Williams, Steven R. and Zachariadis, Konstantinos E., Price Discovery Using a Double Auction (June 2, 2015). Available at SSRN: https://ssrn.com/abstract=2463425 or http://dx.doi.org/10.2139/ssrn.2463425

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)

School of Economics and Finance, Queen Mary University of London ( email )

Graduate Centre
Mile End Campus
London, E1 4NS
United Kingdom
+44 20 7882 8698 (Phone)

HOME PAGE: http://www.konstantinosezachariadis.com

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