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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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File URL: http://www.sciencedirect.com/science/article/pii/S0927-5398(07)00086-2
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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. Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1035-64.
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