Price Discovery Using a Double Auction

81 Pages Posted: 10 Jul 2014 Last revised: 23 Jul 2020

See all articles by Mark Satterthwaite

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: July 22, 2020

Abstract

We devise a tractable model to study the buyer’s bid double auction (BBDA) that allows correlated signals and interdependent values/costs. We demonstrate that simple, easily calculated equilibria exist in small markets. We prove that the incentive for strategic behavior vanishes at a O (1/η) rate where η is an index of the number of buyers and sellers. We then assume, consistent with numerical experiments and theoretical intuition, that this incentive drives trader’s strategies to their limiting values at the same O (1/η) rate. Given this assumption, we prove rates of convergence to zero of (i) the inefficiency in the allocation, and (ii) the error in the market price as an estimate of the rational expectations price. These results together with our numerical experiments suggest that strategic behavior can be inconsequential even in small markets in its effect on allocational efficiency and information aggregation.

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

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

Suggested Citation

Satterthwaite, Mark A. and Williams, Steven R. and Zachariadis, Konstantinos E., Price Discovery Using a Double Auction (July 22, 2020). 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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