A Strategic Theory of Markets

This paper investigates the asymptotic behavior of a Bayesian Nash equilibrium in uniform price double auctions among buyers and sellers with a unit demand and supply who receive private signals independently and identically distributed conditional on the unknown state with the monotone likelihood ratio condition and have interdependent values with a strictly private value element. Every nontrivial mixed strategy Bayesian Nash equilibrium converges to the fully revealing rational expectation equilibrium as the number of buyers and sellers increases and the bid step size goes to zero. A monotone pure strategy Bayesian Nash equilibrium exists in sufficiently large finite economies, and provides a consistent and asymptotically normal estimator of the unknown value when the set of possible bids is continuous.

"Core-Selecting Auctions: An Experimental Study"

Many business and policy problems, such as allocation of spectrum rights and financial assets, involve allocation of heterogeneous objects among players with superadditive values. This paper uses laboratory experiments to study core-selecting auctions (clock-proxy auctions of Ausubel, Cramton, and Milgrom (2004)) recently proposed as a solution to this problem. Our experimental design involves three factors. The first factor is the auction design and we consider generalized Vickrey auctions, simultaneous ascending auctions, and clock-proxy auctions. The second factor is the value structure of agents. In addition to a benchmark case of additive values, we considered superadditive value structures which feature the exposure problem and the coordination problem. The third factor is subject characteristics. We ran experiments with professional traders and university students. We found that clock-proxy auctions outperformed generalized Vickrey auctions. Clock-proxy auctions outperformed simultaneous ascending auctions with the exposure problem value structure, and did statistically equally well with the additive and the coordination problem value structure. The result suggests a trade-off between efficiency improvements and complexity in package bidding. An ANOVA of outcomes demonstrated that auction designs were significant, and the interaction terms were often significant. We estimated the effect of auction design on efficiency and revenue and found that its magnitude depended on the valuation structure and subject characteristics. The result suggests that market design is not one-size-fits-all and a successful design builds on an understanding of fine details of the problem environments.

THE TOKYO FINANCIAL MARKETS RESEARCH DATA SERVICES: I. FACTORS DATA FOR EQUITY MARKETS

We introduce a general purpose data library developed at the Center for Advanced Research in Finance and the Computing Services at the Faculty of Economics of the University of Tokyo for empirical research of the financial markets in Japan. This data library (located at http://www.carf.e.u-tokyo.ac.jp/english/research/trds/trds_intro_e.html) provides a new internationally comparable equity market factors data for Japanese and US markets up to December 2009.

Selling online versus offline: theory and evidences from sotheby’s

We consider a recent business and policy question of ”how and why does a firm use online markets versus traditional offline markets? ” using a unique dataset of more than 3000 auctions held by Sotheby’s online at eBay and offline at New York in June-July2002. We find robust empirical regularities in our dataset about the use of online markets. First, the average transaction price is more than 10 times higher in offline markets. This fact strongly suggests that the seller is not simply randomly assigning assets between online and offline markets. Second, the higher the mean and spread of pre-auction estimates of an asset, the more likely seller is to sell the asset in offline markets. Third, the transaction rate is higher in offline markets. Next, we build a simple model of offline and online markets to identify the business logic behind these empirical regularities. We model offline marketsasanauctionwithendogeneous entry a la McAfee and McMillan (1987) where the traders pay transaction costs to hold transactions. We model online markets as standard ascending auctions. In online markets, the seller can save transaction costs and entry by bidders is easy, but the seller cannot reveal much information, leading to higher valuation risk and severe winner’s curse. The seller sells the asset with high valuation risk in offline markets to alleviate winner’s curse. In order to compensate for the transaction costs, the expected value of the asset sold in offline markets is higher. Since the seller’s profit isequaltosocialsurplusinoffline markets due to entry costs, the seller is more eager to sell assets. Finally we provide a simple maximum likelihood estimation of transaction costs and information revelation effects based on discrete choice models. This paper is based on a joint project with John McMillan

Convergence of Nonlinear Pricing Mechanisms to Optimal Auction Mechanisms with Applications to Optimal Auctions for Heterogeneous Objects

In this paper I first present a new convergence result which will derive an optimal auction mechanism as a limit of standard nonlinear pricing mechanisms. For example, an optimal auction mechanism of Myerson (1981) will be explicitly derived as a limit of nonlinear pricing mechanisms by Mussa and Rosen (1978). Then I apply this convergence result to characterize an optimal auction mechanism for heterogeneous objects from multiproduct nonlinear pricing mechanisms of Rochet and Choné (1998). The optimal auction mechanism has the same reserve price with the nonlinear pricing mechanisms counterpart. Bunching is robust with a new source of bunching based on quantity constraints. I analytically and numerically compute examplesoptimal auction, nonlinear pricing

2005), “Selling Online Versus Live

Abstract. Any seller choosing between auctioning online and live faces a tradeoff: lower transaction costs online against more rents left with the bidders. We model this tradeoff, and apply the theory to auctions of art. The crucial variable in determining whether the seller does better online is not the expected price but the extent of valuation uncertainty

Asset pricing with liquidity risk: A replication and out-of-sample tests with the recent US and the Japanese market data

Acharya and Pedersen (2005, hereafter AP) develop the liquidity-adjusted CAPM (LCAPM) that assets with higher illiquidity costs, higher liquidity risk, and higher market risk have higher average rates of return. Our paper conducts an independent replication and two out-of-sample tests with three datasets (US 1964 to 1999, US 2000 to 2016, and Japan 1978 to 2012), six versions of the LCAPM, and eight test portfolios. We first consider the “one-variable LCAPM test” for the intercept, the illiquidity cost effect, and the net liquidity risk effect. We then consider the “two-variable LCAPM test” that further requires that the market risk premium and the net liquidity risk premium are identical as implied by the AP theory. The LCAPM satisfies the one-variable test in 36.0% of regressions and the two-variable test in 5.2% of regressions conducted using the US data. This result is qualitatively similar across US samples and is consistent with the findings of an independent study by Holden and Nam (2018). The LCAPM does not satisfy either of the two tests in the Japanese market