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The Properties of Double-Blind Dutch Auctions in a Clearing House; Some New Results for the Mendelson Model

Author

Listed:
  • John Knight

    (University of Western Ontario
    Department of Economics, Mathematics & Statistics, Birkbeck)

  • S.E. Satchell

    (Department of Economics, Mathematics & Statistics, Birkbeck
    University of Sydney)

Abstract

In this paper, we re-examine Mendelson’s model for the equilibrium price of a double-blind Dutch auction with Poisson-distributed stochastic demand and supply. We present a number of new results. We focus on the various ways that demand and supply cross. We identify four different categories of crossing, extending Mendelson’s results which are based on a single category of crossing. Secondly, conditioning on quantity, we derive the joint distribution of the relevant demand and supply prices associated with such two-sided markets originally described by Bohm-Bawerk (1891). The distributional result is extended to the case where the limit orders on different sides of the market arrive at different rates. Finally, we derive the distributional properties of the price elasticities.

Suggested Citation

  • John Knight & S.E. Satchell, 2012. "The Properties of Double-Blind Dutch Auctions in a Clearing House; Some New Results for the Mendelson Model," Birkbeck Working Papers in Economics and Finance 1201, Birkbeck, Department of Economics, Mathematics & Statistics.
    • Handle: RePEc:bbk:bbkefp:1201
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    File URL: https://eprints.bbk.ac.uk/id/eprint/5958
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    References listed on IDEAS

    as
    1. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," The Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
    2. David Easley & Robert F. Engle & Maureen O'Hara & Liuren Wu, 2008. "Time-Varying Arrival Rates of Informed and Uninformed Trades," Journal of Financial Econometrics, Oxford University Press, vol. 6(2), pages 171-207, Spring.
    3. Mendelson, Haim, 1987. "Consolidation, Fragmentation, and Market Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(2), pages 189-207, June.
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