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Experimental evidence on trading behavior, market efficiency and price formation in double auctions with unknown trading duration

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Author Info
Darren Duxbury (Leeds University Business School, Maurice Keyworth Building, University of Leeds, LS2 9JT, UK)

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Abstract

The reasons for the highly efficient market outcomes observed under the double auction remain unclear. This paper presents a series of experimental financial markets designed to investigate the importance of unknown trading period duration on trading behavior and the convergence tendencies of such markets. Using panel data techniques the results support the conclusions that individuals generally display more aggressive trading strategies, trading earlier in a period, and that markets exhibit reduced levels of informational efficiency when unknown duration is present. Markets with imperfect information structures are also studied and, in a unique result, are associated with significantly slower rates of trade, as traders become more cautious over their trading strategies. Investigation of the price formation process provides evidence that the pricing error varies over time and the estimation of a fixed effects model provides unique support that learning effects and unknown trading period duration influence the price formation process. Future refinement of theoretical models of the price formation process or institutions of exchange should recognize the effect of unknown trading period duration on market behavior, along with potential learning effects. Copyright © 2005 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/mde.1236
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 26 (2005)
Issue (Month): 8 ()
Pages: 475-497
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Handle: RePEc:wly:mgtdec:v:26:y:2005:i:8:p:475-497

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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  1. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1984. " Futures Markets and Informational Efficiency: A Laboratory Examination," Journal of Finance, American Finance Association, vol. 39(4), pages 955-81, September. [Downloadable!] (restricted)
  2. Copeland, Thomas E & Friedman, Daniel, 1987. " The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study," Journal of Finance, American Finance Association, vol. 42(3), pages 763-97, July. [Downloadable!] (restricted)
  3. Duxbury, Darren, 1995. " Experimental Asset Markets within Finance," Journal of Economic Surveys, Blackwell Publishing, vol. 9(4), pages 331-71, December.
  4. Ang, James S & Schwarz, Thomas, 1985. " Risk Aversion and Information Structure: An Experimental Study of Price Variability in the Securities Markets," Journal of Finance, American Finance Association, vol. 40(3), pages 825-44, July. [Downloadable!] (restricted)
  5. Friedman, Daniel, 1991. "A simple testable model of double auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 15(1), pages 47-70, January. [Downloadable!] (restricted)
  6. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September. [Downloadable!] (restricted)
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  7. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
  8. Ackert, Lucy F. & Church, Bryan & Jayaraman, Narayanan, 2001. "An experimental study of circuit breakers: The effects of mandated market closures and temporary halts on market behavior," Journal of Financial Markets, Elsevier, vol. 4(2), pages 185-208, April. [Downloadable!] (restricted)
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  9. Cason, Timothy N, 2000. "The Opportunity for Conspiracy in Asset Markets Organized with Dealer Intermediaries," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(2), pages 385-416.
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This page was last updated on 2009-11-29.

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