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 EconWPA in its series Microeconomics with number 0302001.
Length: 32 pages
Date of creation: 04 Feb 2003
Date of revision:
Note: Type of Document - PDF; prepared on IBM PC - MikTeX; to print on HP/PostScript; pages: 32 ; figures: included. Published in Games and Economic Behavior
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Double auction; bounded rationality; experimental economics;
Other versions of this item:
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-02-10 (All new papers)
- NEP-IND-2003-02-20 (Industrial Organization)
- NEP-PKE-2003-02-10 (Post Keynesian Economics)
- NEP-RMG-2003-02-10 (Risk Management)
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