A Caltech Library Service

Inducing Liquidity in Thin Financial Markets through Combined-Value Trading Mechanisms

Bossaerts, Peter and Fine, Leslie and Ledyard, John O. (2000) Inducing Liquidity in Thin Financial Markets through Combined-Value Trading Mechanisms. Social Science Working Paper, 1095R. California Institute of Technology , Pasadena, CA. (Unpublished)

[img] PDF (sswp 1095R - Aug. 2000) - Submitted Version
See Usage Policy.


Use this Persistent URL to link to this item:


Previous experimental research has shown that thin financial markets fail to fully equilibrate, in contrast with thick markets. A specific type of market risk is conjectured to be the reason, namely, the risk of partial execution of desired portfolio rearrangements in a system of parallel, unconnected double auction markets. This market risk causes liquidity to dry up before equilibrium is reached. To verify the conjecture, we organized markets directly as a portfolio trading mechanism, allowing agents to better coordinate their orders across securities. The mechanism is an implementation of the combined-value trading (CVT) system. We present evidence that our portfolio trading mechanism facilitates equilibration to the same extent as thick markets do. Like in thick markets, the emergence of equilibrium pricing cannot be attributed to chance. Inspection of order submission and trade activity reveals that subjects manage to exploit the direct linkages between markets presented by the CVT system.

Item Type:Report or Paper (Working Paper)
Related URLs:
URLURL TypeDescription ItemPublished Version
Bossaerts, Peter0000-0003-2308-2603
Additional Information:Revised version. Original dated to March 2000. Financial support was provided by The California Institute of Technology, The New Millennium Project of the Jet Propulsion Laboratory, and by the IBM Fellowship in Experimental Economics. The paper benefited from comments during a conference on liquidity at UCLA in May 2000, and from suggestions by Chester Spatt. Published as Bossaerts, Peter, Leslie Fine, and John Ledyard. "Inducing liquidity in thin financial markets through combined-value trading mechanisms." European Economic Review 46.9 (2002): 1671-1695.
Group:Social Science Working Papers
Funding AgencyGrant Number
Subject Keywords:Liquidity, Portfolio trading, Financial markets, Experimental finance
Series Name:Social Science Working Paper
Issue or Number:1095R
Classification Code:JEL: C92, D44, D51, G12
Record Number:CaltechAUTHORS:20170808-135334937
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79944
Deposited By: Jacquelyn Bussone
Deposited On:09 Aug 2017 18:54
Last Modified:03 Oct 2019 18:25

Repository Staff Only: item control page