Price Formation in Multiple, Simultaneous Continuous Double Auctions, with Implications for Asset Pricing

64 Pages Posted: 4 May 2016 Last revised: 27 Jul 2020

See all articles by Elena N. Asparouhova

Elena N. Asparouhova

University of Utah - David Eccles School of Business

Peter Bossaerts

University of Melbourne - Department of Finance; University of Cambridge

John O. Ledyard

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: July 26, 2020

Abstract

We propose a Marshallian model for price and allocation adjustments in parallel continuous double auctions. Agents quote prices that they expect will maximize local utility improvements. The process generates Pareto optimal allocations in the limit. In experiments designed to induce CAPM equilibrium, price and allocation dynamics are in line with the model’s predictions. Walrasian aggregate excess demands do not provide additional predictive power. We identify, theoretically and empirically, a portfolio that is closer to mean-variance optimal throughout equilibration. This portfolio can serve as a benchmark for asset returns even if markets are not in equilibrium, unlike the market portfolio, which only works at equilibrium. The theory also has implications for momentum, volume and liquidity.

Keywords: Continuous Double Auction, Walrasian Equilibrium, Marshallian Equilibration, Experimental Economics, Asset Pricing Theory.

JEL Classification: C92, D51, G12

Suggested Citation

Asparouhova, Elena N. and Bossaerts, Peter L. and Ledyard, John O., Price Formation in Multiple, Simultaneous Continuous Double Auctions, with Implications for Asset Pricing (July 26, 2020). Available at SSRN: https://ssrn.com/abstract=2774301 or http://dx.doi.org/10.2139/ssrn.2774301

Elena N. Asparouhova (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Peter L. Bossaerts

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

John O. Ledyard

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
228-77
Pasadena, CA 91125
United States
626-395-8482 (Phone)

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