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Allocative Efficiency and Traders’ Protection Under Zero Intelligence Behavior

In: Computational Methods in Economic Dynamics

Author

Listed:
  • Marco LiCalzi

    (University of Venice)

  • Lucia Milone

    (University of Venice)

  • Paolo Pellizzari

    (University of Venice)

Abstract

This paper studies the continuous double auction from the point of view of market engineering: we tweak a resampling rule often used for this exchange protocol and search for an improved design. We assume zero intelligence trading as a lower bound for more robust behavioral rules and look at allocative efficiency, as well as three subordinate performance criteria: mean spread, cancellation rate, and traders’ protection. This latter notion measures the ability of a protocol to help traders capture their share of the competitive equilibrium profits. We consider two families of resampling rules and obtain the following results. Full resampling is not necessary to attain high allocative efficiency, but fine-tuning the resampling rate is important. The best allocative performances are similar across the two families. However, if the market designer adds any of the other three criteria as a subordinate goal, then a resampling rule based on a price band around the best quotes is superior.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:dymchp:978-3-642-16943-4_2
    DOI: 10.1007/978-3-642-16943-4_2
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    Cited by:

    1. is not listed on IDEAS
    2. Roberto Cervone & Stefano Galavotti & Marco LiCalzi, 2009. "Symmetric Equilibria in Double Auctions with Markdown Buyers and Markup Sellers," Lecture Notes in Economics and Mathematical Systems, in: Cesáreo Hernández & Marta Posada & Adolfo López-Paredes (ed.), Artificial Economics, chapter 0, pages 81-92, Springer.

    More about this item

    Keywords

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    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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