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Excess demand and price formation during a Walrasian auction

  • Eaves, James
  • Melvin, Michael
  • Mohapatra, Sandeep

We conduct a detailed analysis of the relationship between excess demand and the convergence of price to equilibrium during a real-world Walrasian auction, paying special attention to the size and speed of the price adjustment. Using data from the Tokyo Grain Exchange (TGE), we first show that because auctions for the various futures contracts occur sequentially, information becomes more evenly dispersed across traders as an auction sequence progresses. Then we show that excess demand is positively correlated with both the eventual price change and the speed with which price adjusts. As information becomes more evenly dispersed, the strength of these relationships weakens. Finally, though excess demand explains a large proportion of the variability of the change in price, it explains only a small proportion of the variability of the speed of adjustment.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 15 (2008)
Issue (Month): 3 (June)
Pages: 533-548

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Handle: RePEc:eee:empfin:v:15:y:2008:i:3:p:533-548
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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  1. Geoffrey Booth, G. & Ciner, Cetin, 1997. "International transmission on information in corn futures markets," Journal of Multinational Financial Management, Elsevier, vol. 7(3), pages 175-187, October.
  2. Theobald, Michael & Yallup, Peter, 2004. "Determining security speed of adjustment coefficients," Journal of Financial Markets, Elsevier, vol. 7(1), pages 75-96, January.
  3. Alfonso Dufour & Robert F. Engle, 2000. "Time and the Price Impact of a Trade," Journal of Finance, American Finance Association, vol. 55(6), pages 2467-2498, December.
  4. Vives Xavier, 1995. "The Speed of Information Revelation in a Financial Market Mechanism," Journal of Economic Theory, Elsevier, vol. 67(1), pages 178-204, October.
  5. Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-36, September.
  6. Foster, F Douglas & Viswanathan, S, 1993. " Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models," Journal of Finance, American Finance Association, vol. 48(1), pages 187-211, March.
  7. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
  8. Kabir, Rezaul & Vermaelen, Theo, 1996. "Insider trading restrictions and the stock market: Evidence from the Amsterdam Stock Exchange," European Economic Review, Elsevier, vol. 40(8), pages 1591-1603, November.
  9. James Eaves & Jeffrey Williams, 2007. "Walrasian Tâtonnement Auctions on the Tokyo Grain Exchange," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1183-1218.
  10. Subrahmanyam, Avanidhar, 1991. "Risk Aversion, Market Liquidity, and Price Efficiency," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 416-41.
  11. Lehmann, Bruce N., 2002. "Some desiderata for the measurement of price discovery across markets," Journal of Financial Markets, Elsevier, vol. 5(3), pages 259-276, July.
  12. Ananth Madhavan & Matthew Richardson & Mark Roomans, . "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Rodney L. White Center for Financial Research Working Papers 20-94, Wharton School Rodney L. White Center for Financial Research.
  13. Dhillon, Upinder S. & Lasser, Dennis J. & Watanabe, Taiji, 1997. "Volatility, information, and double versus walrasian auction pricing in US and Japanese futures markets," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 1045-1061, July.
  14. Ederington, Louis H. & Lee, Jae Ha, 1995. "The Short-Run Dynamics of the Price Adjustment to New Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 117-134, March.
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