Theory Workshop - Peter Bossaerts (Cambridge)

Title: Price Formation in Multiple Simultaneous Continuous Double Auctions, with Implications for Asset Pricing (joint with E Asparouhova (U Utah) and J Ledyard (Caltech)

Abstract: We propose a Marshallian model for price and allocation adjustments in multi-good, continuous double auctions when agents have limited information as to where prices are drifting. Agents quote offers that they expect will maximize local utility improvements. Quantity moves to those agents who have most to gain from trade. In experiments with three securities designed to induce the Capital Asset Pricing Model, we reject the Walrasian model of price dynamics on within-period price changes. Instead, price as well as allocation dynamics are correctly predicted by the Marshallian model. In the CAPM equilibrium, the market portfolio generates the highest mean return given return volatility. We identify, theoretically, a portfolio that is at least as good, even off-equilibrium. In the experiments, this portfolio does perform on average better than the market portfolio.

Read the paper here: https://www.econ.cam.ac.uk/intranet/seminars/StatusLossAversion-2023-01-24T154013-483.pdf