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Simple market protocols for efficient risk sharing

Author

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  • Marco LiCalzi

    (University of Venice, Italy)

  • Paolo Pellizzari

    (University of Venice, Italy)

Abstract

This paper studies the performance of four market protocols with regard 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 space of messages for traders is simple. We test the protocols by running (computerized) experiments in an environment that controls for traders’ 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 clearly associated with the best all-round performance.

Suggested Citation

  • Marco LiCalzi & Paolo Pellizzari, 2005. "Simple market protocols for efficient risk sharing," Finance 0504019, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0504019
    Note: Type of Document - pdf; pages: 29. 29-page PDF document submitted via ftp
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    References listed on IDEAS

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    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. 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.
    5. 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.
    6. 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.
    7. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    8. Marco LiCalzi & Paolo Pellizzari, 2006. "The allocative effectiveness of market protocols under intelligent trading," Working Papers 134, Department of Applied Mathematics, Università Ca' Foscari Venezia.
    9. 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.
    10. Nicolas Audet & Toni Gravelle & Jing Yang, 2002. "Alternative Trading Systems: Does One Shoe Fit All?," Staff Working Papers 02-33, Bank of Canada.
    11. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    12. Mark A. Satterthwaite & Steven R. Williams, 2002. "The Optimality of a Simple Market Mechanism," Econometrica, Econometric Society, vol. 70(5), pages 1841-1863, September.
    13. 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.
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    Citations

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    Cited by:

    1. Marco LiCalzi & Paolo Pellizzari, 2008. "Zero-Intelligence Trading without Resampling," Working Papers 164, Department of Applied Mathematics, Università Ca' Foscari Venezia.
    2. 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.
    3. 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.
    4. 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.
    5. Marco LiCalzi & Lucia Milone & Paolo Pellizzari, 2008. "Allocative efficiency and traders' protection under zero intelligence behavior," Working Papers 168, Department of Applied Mathematics, Università Ca' Foscari Venezia, revised Nov 2009.
    6. 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.
    7. Marco LiCalzi & Paolo Pellizzari, 2006. "The allocative effectiveness of market protocols under intelligent trading," Working Papers 134, Department of Applied Mathematics, Università Ca' Foscari Venezia.

    More about this item

    Keywords

    market microstructure; allocative efficiency; comparison of market institutions; agent-based simulations.;

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other

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