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Simple Market Protocols for Efficient Risk Sharing

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Author Info

  • Marco LiCalzi

    ()
    (Department of Applied Mathematics, University of Venice)

  • Paolo Pellizzari

    (Department of Applied Mathematics, University of Venice)

Abstract

This paper studies the performance of four market protocols with egard to allocative efficiency and other performance criteria such as volume or volatility. We examine batch auctions, continuous double auctions, specialist dealerships, and a hybrid of these last two. All protocols are practically implementable because the messages that traders need to use are simple. We test the protocols by running (computerized) experiments in an environment that controls for tradersÕ behavior and rules out any informational effect. We find that all protocols generically converge to the efficient allocation in finite time. An extended comparison over other performance criteria produces no clear winner, but the presence of a specialist is associated with the best all-round performance.

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Bibliographic Info

Paper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 136.

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Length: 27 pages
Date of creation: Jul 2006
Date of revision:
Publication status: Published in Journal of Economic Dynamics and Control 31, 2007, 3568-3590
Handle: RePEc:vnm:wpaper:136

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Keywords: market microstructure; allocative efficiency; comparison of market institutions; performance criteria.;

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References

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  1. Marco LiCalzi & Paolo Pellizzari, 2006. "The allocative effectiveness of market protocols under intelligent trading," Working Papers 134, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  2. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
  3. Hurwicz, Leonid & Radner, Roy & Reiter, Stanley, 1975. "A Stochastic Decentralized Resource Allocation Process: Part II," Econometrica, Econometric Society, vol. 43(3), pages 363-93, May.
  4. Marco LiCalzi & Paolo Pellizzari, 2002. "Fundamentalists Clashing over the Book: A Study of Order-Driven Stock Markets," Computational Economics 0207001, EconWPA, revised 04 Mar 2003.
  5. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
  6. Nicolas Audet & Toni Gravelle & Jing Yang, 2002. "Alternative Trading Systems: Does One Shoe Fit All?," Working Papers 02-33, Bank of Canada.
  7. Bottazzi, Giulio & Dosi, Giovanni & Rebesco, Igor, 2005. "Institutional architectures and behavioral ecologies in the dynamics of financial markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 197-228, February.
  8. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  9. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Tymon Tatur, 2005. "On the Trade off Between Deficit and Inefficiency and the Double Auction with a Fixed Transaction Fee," Econometrica, Econometric Society, vol. 73(2), pages 517-570, 03.
  11. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
  12. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  13. Mark A. Satterthwaite & Steven R. Williams, 2002. "The Optimality of a Simple Market Mechanism," Econometrica, Econometric Society, vol. 70(5), pages 1841-1863, September.
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Citations

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Cited by:
  1. Marco LiCalzi & Lucia Milone & Paolo Pellizzari, 2008. "Allocative efficiency and traders' protection under zero intelligence behavior," Working Papers 168, Department of Applied Mathematics, Università Ca' Foscari Venezia, revised Nov 2009.
  2. Paolo Pellizzari & Arianna Dal Forno, 2006. "A comparison of different trading protocols in an agent-based market," Working Papers 140, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  3. Anufriev, Mikhail & Panchenko, Valentyn, 2009. "Asset prices, traders' behavior and market design," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1073-1090, May.
  4. Ladley, Dan & Schenk-Hoppé, Klaus Reiner, 2009. "Do stylised facts of order book markets need strategic behaviour?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 817-831, April.
  5. Marco LiCalzi & Paolo Pellizzari, 2006. "The allocative effectiveness of market protocols under intelligent trading," Working Papers 134, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  6. Marco LiCalzi & Paolo Pellizzari, 2008. "Zero-Intelligence Trading without Resampling," Working Papers 164, Department of Applied Mathematics, Università Ca' Foscari Venezia.

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