Price Formation in Double Auctions
AbstractWe develop a model of information processing and strategy choice for participants in a double auction. Sellers in this model form beliefs that an offer will be accepted by some buyer. Similarly, buyers form beliefs that a bid will be accepted. These beliefs are formed on the basis of observed market data, including frequencies of asks, bids, accepted asks, and accepted bids. Then traders choose an action that maximizes their own expected surplus. The trading activity resulting from these beliefs and strategies is sufficient to achieve transaction prices at competitive equilibrium and complete market efficiency after several periods of trading.
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Bibliographic InfoPaper provided by Minnesota - Center for Economic Research in its series Papers with number 284.
Length: 27 pages
Date of creation: 1995
Date of revision:
Contact details of provider:
Postal: UNIVERSITY OF MINNESOTA, CENTER FOR ECONOMIC RESEARCH, DEPARTMENT OF ECONOMICS, MINNEAPOLIS MINNESOTA 35455 U.S.A.
Web page: http://www.econ.umn.edu/
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Other versions of this item:
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
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