Marshall and Walras, Disequilibrium Trades and the Dynamics of Equilibriation in the Continuous Double Auction Market

Prices and quantities converge to the theoretical competitive equilibria in continuous, double auction markets. The double auction is not a tatonnement mechanism. Disequilibrium trades take place. The absence of any influence of disequilibrium trades, which have the capacity to change the theoretical equilibrium, appears to be due to a property found in the Marshallian model of single market adjustments. The Marshallian model incorporates a principle of self-organizing, coordination that mysteriously determines the sequence in which specific pairs of agents trade in an environment in which market identities and agent preferences are not public. Disequilibrium trades along the Marshallian path of trades do not change the theoretical equilibrium. The substance of this paper is to demonstrate that the Marshallian principle captures a natural tendency of the adjustment in single, continuous, double auction markets and to suggest how it takes place. The Marshallian model of quantity adjustment and the Walrasian model of market price adjustment can be seen as companion theories that explain the allocation and price processes of a market. The Marshallian model explains the evolution of the allocation, who will meet and trade, and the Walrasian excess demand explains the evolution of prices when they do

Price Formation in Multiple, Simultaneous Continuous Double Auctions, with Implications for Asset Pricing

We propose a Marshallian model for price and allocation adjustments in parallel continuous double auctions. Agents quote prices that they expect will maximize local utility improvements. The process generates Pareto optimal allocations in the limit. In experiments designed to induce CAPM equilibrium, price and allocation dynamics are in line with the model's predictions. Walrasian aggregate excess demands do not provide additional predictive power. We identify, theoretically and empirically, a portfolio that is closer to mean-variance optimal throughout equilibration. This portfolio can serve as a benchmark for asset returns even if markets are not in equilibrium, unlike the market portfolio, which only works at equilibrium. The theory also has implications for momentum, volume and liquidity

Mythical Ages and Methodological Strictures - Joan Robinson's Contributions to the Theory of Economic Growth

This paper considers some methodological aspects of Joan Robinson's contribution to post-Keynesian growth theory. Joan Robinson's criticisms of equilibrium analysis, of the conflation of logical and historical time and of the uses (and misuses) of mathematical formalisation are scathing. But while many of her points are well taken, parts of her argument appear questionable. As a result, her methodological critique of equilibrium economics may be misleading. Moreover, she failed to appreciate the potential gains from mathematical formalisation. The further development of a Robinsonian analysis of economic growth calls for a reconsideration of these aspects of her legacy.Joan Robinson, equilibrium, stability, historical time

Market Design and the Stability of General Equilibrium

AcceptedArticleWe employ laboratory methods to study the stability of competitive equilibrium in Scarf’s economy (International Economic Review, 1960). Tatonnement theory predicts that prices are globally unstable for this economy, i.e. unless prices start at the competitive equilibrium they oscillate without converging. Anderson et al. (Journal of Economic Theory, 2004) report that in laboratory double auction markets, prices in the Scarf economy do indeed oscillate with no clear sign of convergence. We replicate their experiments and confirm that tatonnement theory predicts the direction of price changes remarkably well. Prices are globally unstable with adverse effects for the economy’s efficiency and the equitable distribution of the gains from trade. We also introduce a novel market mechanism where participants submit demand schedules and prices are computed using Smale’s global Newtonian dynamic (American Economic Review, 1976). We show that for the Scarf economy, submitting a competitive schedule, i.e. a set of quantities that maximize utility taking prices as given, is a weakly dominant strategy. The resulting outcome is the unique competitive equilibrium of the Scarf economy. In experiments using the schedule market, prices converge quickly to the competitive equilibrium. Besides stabilizing prices, the schedule market is more efficient and results in highly egalitarian outcomes.We would like to thank the Swiss National Science Foundation (SNSF 138162) and the European Research Council (ERC Advanced Investigator Grant, ESEI-249433) for financial support. We are grateful for useful suggestions we received from seminar participants at University of Nottingham and the ESA meeting in New Yor

Global Instability in Experimental General Equilibrium: The Scarf Example

Scarf (1960) proposed a market environment and a model of dynamic adjustment in which the standard tatonnement price adjustment process orbits around, rather than converges to, the competitive equilibrium. Hirota (1981) characterized the price paths by the configuration of endowments. We explore the predictions of Scarf's model in a nontatonnement experimental double auction. We find that the average transaction prices in each period do follow the path predicted by the Scarf and Hirota models. When the model predicts prices will converge to the competitive equilibrium, our data converge; when the model predicts prices will orbit our data orbit the equilibrium, and in the direction predicted by the model. Moreover, we observe a weak tendency for prices within a period to follow the path predicted by the model

Call market experiments : efficiency and price discovery through multiple calls and emergent newton adjustments

We study multiple-unit, laboratory experimental call markets in which orders are cleared by a single price at a scheduled “call”. The markets are independent trading “days” with two calls each day preceded by continuous and public order flow. Markets approach the competitive equilibrium over time. The price formation dynamics operate through the flow of bids and asks configured as the “jaws” of the order book with contract execution featuring elements of an underlying mathematical principle, the Newton-Raphson method for solving systems of equations. Both excess demand and its slope play a systematic role in call market price discovery