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Excess demand and equilibration in multi-security financial markets: the empirical evidence

Asparouhova, Elena and Bossaerts, Peter and Plott, Charles (2003) Excess demand and equilibration in multi-security financial markets: the empirical evidence. Journal of Financial Markets, 6 (1). pp. 1-21. ISSN 1386-4181. doi:10.1016/S1386-4181(02)00042-3.

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Price dynamics are studied in a dataset of more than 11,000 transactions from large-scale financial markets experiments with multiple risky securities. The aim is to determine whether a few simple principles govern equilibration. We first ask whether price changes are driven by excess demand. The data strongly support this conjecture. Second, we investigate the presence of cross-security effects (the excess demands of other securities influence price changes of a security beyond its own excess demand). We find systematic cross-security effects, despite the fact that transactions in one market cannot be made conditional on events in other markets. Nevertheless, stability is not found to be compromised in our data. A curious relationship emerges between the signs of the cross-effects and the signs of the covariances of the payoffs of the corresponding securities. It suggests a link between price discovery in real markets and the Newton procedure in numerical computation of general equilibrium. Next, we investigate whether the book (the set of posted limit orders) plays a role in the process by which excess demand becomes reflected in transaction price changes. We find strong correlation between excess demands and a weighted average of the quotes in the book. The correlation is far from perfect, and we document that our weighted average of the quotes in the book explains part of the variance of transaction price changes that is unaccounted for by excess demands.

Item Type:Article
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Bossaerts, Peter0000-0003-2308-2603
Additional Information: © 2002 Elsevier Science B.V. Financial support was provided by the National Science Foundation, the California Institute of Technology, and the R. G. Jenkins Family Fund. We thank the editor, Matt Spiegel, and an anonymous referee for helpful comments. Awarded the Journal of Financial Markets 2003 Best Paper Award.
Funding AgencyGrant Number
R. G. Jenkins Family FundUNSPECIFIED
Subject Keywords:Price discovery; Walrasian model; Market microstructure; Experimental finance; Asset pricing theory
Issue or Number:1
Classification Code:JEL: D51; G12
Record Number:CaltechAUTHORS:20140317-153246985
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Official Citation:Elena Asparouhova, Peter Bossaerts, Charles Plott, Excess demand and equilibration in multi-security financial markets: the empirical evidence, Journal of Financial Markets, Volume 6, Issue 1, January 2003, Pages 1-21, ISSN 1386-4181, (
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:44371
Deposited On:18 Mar 2014 16:56
Last Modified:10 Nov 2021 16:51

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