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

Asparouhova, Elena and Bossaerts, Peter and Ledyard, John O. (2020) Price Formation in Multiple, Simultaneous Continuous Double Auctions, with Implications for Asset Pricing. Social Science Working Paper, 1450. California Institute of Technology , Pasadena, CA. (Unpublished) https://resolver.caltech.edu/CaltechAUTHORS:20200727-111303655

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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.


Item Type:Report or Paper (Working Paper)
ORCID:
AuthorORCID
Bossaerts, Peter0000-0003-2308-2603
Additional Information:We would like to thank Bernard Cornet for pointing out a mistake in an earlier draft, and to Sean Crockett, Dan Friedman and Sophie Moinas for their comments and suggestions. We gratefully acknowledge comments on prior versions from participants in seminars (Bocconi, UBC, Copenhagen Business School, Columbia University, GATE (Lyon, France), U of Geneva, Hebrew University, U of Lausanne, U of Michigan, NYSE, New University in Lisbon, Norwegian Business School, Norwegian School of Economics and Business Administration, Ohio State University, SEC, Stanford, SIFR, Tel Aviv University, UC Berkeley, UC Irvine, UC San Diego, UC Santa Cruz, U of Kansas, U of Paris–Dauphine; U of Vienna, U of Zurich) and conferences (2003 ESA meetings, 2003 WFAs, 2003 and 2009 SAET, 2004 Kyoto Conference on Experiments in Economic Sciences, 2005 Princeton Conference on Econometrics and Experimental Economics, 2005 Purdue Conference in honor of Roko Aliprantis, 2006 Decentralization Conference in Paris, 2010 Experimental Society Conference in Gothenburg, 2016 Experimental Finance Society Conference, Tucson), and the 2018 ESAM meetings in Auckland, New Zealand. We acknowledge the support from NSF grant SES-0527491 Bossaerts, Ledyard), SES-0616431 (Bossaerts), SES-106184 (Asparouhova, Bossaerts), and the Swiss Finance Institute (Bossaerts).
Group:Social Science Working Papers
Funders:
Funding AgencyGrant Number
NSFSES-0527491
NSFSES-0616431
NSFSES-106184
Swiss Finance InstituteUNSPECIFIED
Subject Keywords:Continuous Double Auction, Walrasian Equilibrium, Marshallian Equilibration, Experimental Economics, Asset Pricing.
Series Name:Social Science Working Paper
Issue or Number:1450
Record Number:CaltechAUTHORS:20200727-111303655
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20200727-111303655
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:104593
Collection:CaltechAUTHORS
Deposited By: Hanna Storlie
Deposited On:28 Jul 2020 16:16
Last Modified:28 Jul 2020 16:16

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