Simple market protocols for efficient risk sharing

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 i...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2007-11, Vol.31 (11), p.3568-3590
Main Authors: LiCalzi, Marco, Pellizzari, Paolo
Format: Article
Language:English
Subjects:
Allocations
Allocative efficiency
Auctions
Capital market
Comparison of market institutions
Computational methods
Market analysis
Market microstructure
Market structure
Performance criteria
Protocol
Risk sharing
Studies
Volatility
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Summary: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 messages that traders need to use are 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 associated with the best all-round performance.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2006.12.007