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Inducing liquidity in thin financial markets through combined-value trading mechanisms

Bossaerts, Peter and Fine, Leslie and Ledyard, John (2002) Inducing liquidity in thin financial markets through combined-value trading mechanisms. European Economic Review, 46 (9). pp. 1671-1695. ISSN 0014-2921. https://resolver.caltech.edu/CaltechAUTHORS:20170809-145541198

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Abstract

Asset pricing theory hypothesizes that investors are only interested in portfolios; individual securities are evaluated only in terms of their contribution to portfolio risk and return. Yet, standard financial market design is that of parallel, unconnected markets, whereby investors cannot submit orders in one market conditional on events in others. When markets are thin, this exposes them to substantial execution risk. Fear of ending up with unbalanced portfolios after trading may even keep investors from submitting orders, further eroding liquidity and the ability of markets to equilibrate. The suggested solution is a portfolio trading mechanism referred to as combined-value trading (CVT). Investors are allowed to submit orders for packages of securities and the system matches trades and computes prices by optimally combining portfolio orders in an open book. We study the performance of the CVT mechanism experimentally and compare it to the performance of parallel, unconnected double auctions in experiments with similar parametrization and either a similar number of subjects or substantially thicker markets. We present evidence that our portfolio trading mechanism facilitates equilibration to the extent that the thicker markets do. Inspection of order submission and trade activity reveals that subjects manage to exploit the direct linkages between markets enabled by the CVT system.


Item Type:Article
Related URLs:
URLURL TypeDescription
https://doi.org/10.1016/S0014-2921(02)00240-4DOIArticle
http://www.sciencedirect.com/science/article/pii/S0014292102002404PublisherArticle
http://resolver.caltech.edu/CaltechAUTHORS:20170808-135334937 Related ItemWorking Paper
ORCID:
AuthorORCID
Bossaerts, Peter0000-0003-2308-2603
Additional Information:© 2002 Elsevier Science B.V. Available online 9 October 2002.
Subject Keywords:Liquidity; Portfolio trading; Financial markets; Experimental finance
Issue or Number:9
Classification Code:JEL: C92; D44; D51; G12
Record Number:CaltechAUTHORS:20170809-145541198
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20170809-145541198
Official Citation:Peter Bossaerts, Leslie Fine, John Ledyard, Inducing liquidity in thin financial markets through combined-value trading mechanisms, European Economic Review, Volume 46, Issue 9, October 2002, Pages 1671-1695, ISSN 0014-2921, https://doi.org/10.1016/S0014-2921(02)00240-4. (http://www.sciencedirect.com/science/article/pii/S0014292102002404)
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80033
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:09 Aug 2017 22:06
Last Modified:03 Oct 2019 18:26

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