IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v31y2007i11p3568-3590.html
   My bibliography  Save this article

Simple market protocols for efficient risk sharing

Author

Listed:
  • LiCalzi, Marco
  • Pellizzari, Paolo

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • LiCalzi, Marco & Pellizzari, Paolo, 2007. "Simple market protocols for efficient risk sharing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3568-3590, November.
  • Handle: RePEc:eee:dyncon:v:31:y:2007:i:11:p:3568-3590
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165-1889(07)00013-9
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-955, December.
    2. Hurwicz, Leonid & Radner, Roy & Reiter, Stanley, 1975. "A Stochastic Decentralized Resource Allocation Process: Part I," Econometrica, Econometric Society, vol. 43(2), pages 187-221, March.
    3. 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.
    4. Charlotte Bruun (ed.), 2006. "Advances in Artificial Economics," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-540-37249-3, February.
    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. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    7. Marco Licalzi & Paolo Pellizzari, 2003. "Fundamentalists clashing over the book: a study of order-driven stock markets," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 470-480.
    8. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    9. Marco LiCalzi & Paolo Pellizzari, 2006. "The Allocative Effectiveness of Market Protocols Under Intelligent Trading," Lecture Notes in Economics and Mathematical Systems, in: Charlotte Bruun (ed.), Advances in Artificial Economics, chapter 2, pages 17-29, Springer.
    10. 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 119-137, February.
    11. Nicolas Audet & Toni Gravelle & Jing Yang, 2002. "Alternative Trading Systems: Does One Shoe Fit All?," Staff Working Papers 02-33, Bank of Canada.
    12. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and 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.
    14. 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, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Iryna Veryzhenko & Arthur Jonath & Etienne Harb, 2020. "Non-Value-Added Tax to Improve Market Fairness," Working Papers hal-02881064, HAL.
    2. Iryna Veryzhenko & Arthur Jonath & Etienne Harb, 2022. "Non-Value-Added Tax to improve market fairness and quality," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-30, December.
    3. Nathalie Oriol & Iryna Veryzhenko, 2019. "Market structure or traders' behavior? A multi agent model to assess flash crash phenomena and their regulation," Quantitative Finance, Taylor & Francis Journals, vol. 19(7), pages 1075-1092, July.
    4. Marco LiCalzi & Paolo Pellizzari, 2008. "Zero-Intelligence Trading Without Resampling," Lecture Notes in Economics and Mathematical Systems, in: Klaus Schredelseker & Florian Hauser (ed.), Complexity and Artificial Markets, chapter 1, pages 3-14, Springer.
    5. 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.
    6. Michiel Leur & Mikhail Anufriev, 2018. "Timing under individual evolutionary learning in a continuous double auction," Journal of Evolutionary Economics, Springer, vol. 28(3), pages 609-631, August.
    7. Paolo Pellizzari & Arianna Forno, 2007. "A comparison of different trading protocols in an agent-based market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 2(1), pages 27-43, June.
    8. 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.
    9. Marco LiCalzi & Lucia Milone & Paolo Pellizzari, 2011. "Allocative Efficiency and Traders’ Protection Under Zero Intelligence Behavior," Dynamic Modeling and Econometrics in Economics and Finance, in: Herbert Dawid & Willi Semmler (ed.), Computational Methods in Economic Dynamics, pages 5-28, Springer.
    10. Marco LiCalzi & Paolo Pellizzari, 2006. "The Allocative Effectiveness of Market Protocols Under Intelligent Trading," Lecture Notes in Economics and Mathematical Systems, in: Charlotte Bruun (ed.), Advances in Artificial Economics, chapter 2, pages 17-29, Springer.
    11. Paolo Pellizzari, 2008. "The Toll of Subrational Trading in an Agent Based Economy," Research Paper Series 217, Quantitative Finance Research Centre, University of Technology, Sydney.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Marco LiCalzi & Lucia Milone & Paolo Pellizzari, 2011. "Allocative Efficiency and Traders’ Protection Under Zero Intelligence Behavior," Dynamic Modeling and Econometrics in Economics and Finance, in: Herbert Dawid & Willi Semmler (ed.), Computational Methods in Economic Dynamics, pages 5-28, Springer.
    3. Paolo Pellizzari & Arianna Forno, 2007. "A comparison of different trading protocols in an agent-based market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 2(1), pages 27-43, June.
    4. Marco LiCalzi & Paolo Pellizzari, 2008. "Zero-Intelligence Trading Without Resampling," Lecture Notes in Economics and Mathematical Systems, in: Klaus Schredelseker & Florian Hauser (ed.), Complexity and Artificial Markets, chapter 1, pages 3-14, Springer.
    5. Michiel Leur & Mikhail Anufriev, 2018. "Timing under individual evolutionary learning in a continuous double auction," Journal of Evolutionary Economics, Springer, vol. 28(3), pages 609-631, August.
    6. Jacob Gyntelberg & Mico Loretan & Tientip Subhanij & Eric Chan, 2010. "Private information, stock markets, and exchange rates," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 186-210, Bank for International Settlements.
    7. 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.
    8. PASCUAL, Roberto & VEREDAS, David, 2006. "Does the open limit order book matter in explaining long run volatility ?," LIDAM Discussion Papers CORE 2006110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Ozsoylev, Han N. & Takayama, Shino, 2010. "Price, trade size, and information revelation in multi-period securities markets," Journal of Financial Markets, Elsevier, vol. 13(1), pages 49-76, February.
    10. Gjerstad, Steven & Dickhaut, John, 1998. "Price Formation in Double Auctions," Games and Economic Behavior, Elsevier, vol. 22(1), pages 1-29, January.
    11. Flåm, S.D. & Godal, O., 2008. "Market clearing and price formation," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 956-977, March.
    12. Maureen O'Hara, 2001. "Overview: market structure issues in market liquidity," BIS Papers chapters, in: Bank for International Settlements (ed.), Market liquidity: proceedings of a workshop held at the BIS, volume 2, pages 1-8, Bank for International Settlements.
    13. Cappellini, Alessandro & Ferraris, Gianluigi, 2007. "Waiting Times in Simulated Stock Markets," MPRA Paper 7324, University Library of Munich, Germany.
    14. Steinbacher, Matjaz, 2008. "Stochastic Processes in Finance and Behavioral Finance," MPRA Paper 13603, University Library of Munich, Germany.
    15. Malte Krueger, 2012. "Money: A Market Microstructure Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1245-1258, September.
    16. Martin D. D. Evans & Richard K. Lyons, 2017. "How is Macro News Transmitted to Exchange Rates?," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 14, pages 547-596, World Scientific Publishing Co. Pte. Ltd..
    17. DESGRANGES, Gabriel & FOUCAULT, Thierry, 2000. "Reputation-based pricing and price improvements in dealership markets," HEC Research Papers Series 716, HEC Paris, revised 01 Mar 2002.
    18. Matthieu Wyart & Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters & Michele Vettorazzo, 2006. "Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets," Science & Finance (CFM) working paper archive 500067, Science & Finance, Capital Fund Management.
    19. Steven Gjerstad & Jason M. Shachat, 2007. "Individual Rationality and Market Efficiency," Purdue University Economics Working Papers 1204, Purdue University, Department of Economics.
    20. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2005. "Market microstructure: A survey of microfoundations, empirical results, and policy implications," Journal of Financial Markets, Elsevier, vol. 8(2), pages 217-264, May.

    More about this item

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:31:y:2007:i:11:p:3568-3590. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jedc .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.