Research seminars

Competitive Off-equilibrium: theory and experiment

Finance

Speaker: Peter Bossaerts
The University of Melbourne

8 September 2016 - T201 - From 2:00 pm to 3:15 pm


Competitive Off-equilibrium: Theory and Experiment∗

ELENA ASPAROUHOVA, PETER BOSSAERTS and JOHN LEDYARD

ABSTRACT

We propose a Marshallian model for price and quantity adjustment in parallel continuous double auctions. Investors submit orders only for small quantities, and at prices that max-imize the local utility improvements. Pareto optimality, on which equilibrium asset pricing theory is built, is eventually reached. Experiments designed with the CAPM in mind show that, consistent with the theory (i) contrary to the standard Walrasian price adjustment model, price changes cross-autocorrelate with excess demands depending on covariances of liquidating dividends; (ii) a risk-weighted endowment portfolio is closer to mean-variance optimality than the market portfolio; (iii) individual portfolios are under-diversified, and more so when dividend covariances are positive.

JEL Classification: G11, G12, G14

Keywords: Asset pricing theory, Experimental Finance, Walrasian Equilibrium, Local
Marshallian Equilibrium, Price Discovery.

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