Inducing Liquidity in Thin Financial Markets through Combined-Value Trading Mechanisms
- Creators
- Bossaerts, Peter
- Fine, Leslie
- Ledyard, John O.
Abstract
Previous experimental research has shown that thin financial markets fail to fully equilibrate, in contrast with thick markets. A specific type of market risk is conjectured to be the reason, namely, the risk of partial execution of desired portfolio rearrangements in a system of parallel, unconnected double auction markets. This market risk causes liquidity to dry up before equilibrium is reached. To verify the conjecture, we organized markets directly as a portfolio trading mechanism, allowing agents to better coordinate their orders across securities. The mechanism is an implementation of the combined-value trading (CVT) system. We present evidence that our portfolio trading mechanism facilitates equilibration to the same extent as thick markets do. Like in thick markets, the emergence of equilibrium pricing cannot be attributed to chance. Inspection of order submission and trade activity reveals that subjects manage to exploit the direct linkages between markets presented by the CVT system.
Additional Information
Revised version. Original dated to March 2000. Financial support was provided by The California Institute of Technology, The New Millennium Project of the Jet Propulsion Laboratory, and by the IBM Fellowship in Experimental Economics. The paper benefited from comments during a conference on liquidity at UCLA in May 2000, and from suggestions by Chester Spatt. Published as Bossaerts, Peter, Leslie Fine, and John Ledyard. "Inducing liquidity in thin financial markets through combined-value trading mechanisms." European Economic Review 46.9 (2002): 1671-1695.Attached Files
Submitted - sswp1095_-_revised.pdf
Files
Name | Size | Download all |
---|---|---|
md5:ac34365c7e9332c3d56d6082b6bc0dd6
|
242.1 kB | Preview Download |
Additional details
- Eprint ID
- 79944
- Resolver ID
- CaltechAUTHORS:20170808-135334937
- Caltech
- JPL
- IBM
- Created
-
2017-08-09Created from EPrint's datestamp field
- Updated
-
2019-10-03Created from EPrint's last_modified field
- Caltech groups
- Social Science Working Papers
- Series Name
- Social Science Working Paper
- Series Volume or Issue Number
- 1095R