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Equilibrium Discovery and Preopening Mechanisms in an Experimental Market

Author

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  • Bruno Biais

    (Toulouse School of Economics (Centre National de la Recherche Scientifique/Centre de Recherche en Management and Fédération des Banques Françaises/Institut d'Économie Industrielle Chair on Investment Banking and Financial Markets), Université Toulouse 1 Capitole, 31000 Toulouse, France)

  • Christophe Bisière

    (Toulouse School of Economics (Institut d'Administration des Entreprises, Institut d'Économie Industrielle, Centre de Recherche en Management), Université Toulouse 1 Capitole, 31000 Toulouse, France)

  • Sébastien Pouget

    (Toulouse School of Economics (Institut d'Administration des Entreprises, Institut d'Économie Industrielle, Centre de Recherche en Management), Université Toulouse 1 Capitole, 31000 Toulouse, France)

Abstract

We experimentally analyze how to design preopening mechanisms facilitating coordination on high equilibrium liquidity and gains from trade. We allow a call auction to be preceded by a preopening or not, preopening orders to be binding or not, and the opening time to be deterministic or random. When the preopening is nonbinding, traders place manipulative orders, reducing the credibility of preplay communication. Random market opening deters manipulation, but also hinders communication by making it costly. Gains from trade are maximized when preopening orders are binding. This enables some traders to place early limit orders, attracting further liquidity.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1787 . This paper was accepted by Wei Xiong, finance.

Suggested Citation

  • Bruno Biais & Christophe Bisière & Sébastien Pouget, 2014. "Equilibrium Discovery and Preopening Mechanisms in an Experimental Market," Management Science, INFORMS, vol. 60(3), pages 753-769, March.
    • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:3:p:753-769
    DOI: 10.1287/mnsc.2013.1787
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    2. Chakraborty, Archishman & Pagano, Michael S. & Schwartz, Robert A., 2012. "Order revelation at market openings," Journal of Financial Markets, Elsevier, vol. 15(2), pages 127-150.
    3. Brice Corgnet & Cary Deck & Mark DeSantis & Kyle Hampton & Erik O. Kimbrough, 2023. "When Do Security Markets Aggregate Dispersed Information?," Management Science, INFORMS, vol. 69(6), pages 3697-3729, June.
    4. Cipriani, Marco & Fostel, Ana & Houser, Daniel, 2021. "Leverage and asset prices: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 700-717.
    5. Brünner, Tobias & Levinsky, Rene, 2020. "Price discovery and gains from trade in asset markets with insider trading," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224618, Verein für Socialpolitik / German Economic Association.
    6. Pablo Hernández-Lagos & Paul Povel & Giorgo Sertsios, 2017. "An Experimental Analysis of Risk-Shifting Behavior," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 6(1), pages 68-101.
    7. Bergheimer, Stefan & Cantillon, Estelle & Reguant, Mar, 2023. "Price and quantity discovery without commitment," International Journal of Industrial Organization, Elsevier, vol. 90(C).
    8. Stefano Lovo, 2009. "Preopening and equilibrium selection," Post-Print hal-00495940, HAL.
    9. Silvio John Camilleri, 2015. "The Impact of Stock Market Structure on Volatility: Evidence from a Call Auction Suspension," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 44-53, April.
    10. Roy, Nilanjan, 2017. "Action revision, information and collusion in an experimental duopoly market," MPRA Paper 77033, University Library of Munich, Germany.
    11. Moshirian, Fariborz & Nguyen, Huong Giang (Lily) & Pham, Peter Kien, 2012. "Overnight public information, order placement, and price discovery during the pre-opening period," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2837-2851.
    12. Roy, Nilanjan, 2023. "Fostering collusion through action revision in duopolies," Journal of Economic Theory, Elsevier, vol. 208(C).
    13. Xiao, Xijuan & Yamamoto, Ryuichi, 2020. "Price discovery, order submission, and tick size during preopen period," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    14. , & , & , & ,, 2014. "Asynchronicity and coordination in common and opposing interest games," Theoretical Economics, Econometric Society, vol. 9(2), May.
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    16. Duong, Huu Nhan & Goyal, Abhinav & Kallinterakis, Vasileios & Veeraraghavan, Madhu, 2021. "Market manipulation rules and IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 67(C).

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