Housing Market Price Tier Movements in an Expansion and Collapse

The subprime mortgage crisis has done more damage to the financial system than any financial crisis since the depression. This paper examines the Federal Reserve’s expansionary monetary policy during the early part of this decade, the effect of that expansionary policy on mortgage market liquidity, the effects of that liquidity on housing price movements, and the way that those price movements contributed to the severity of the financial crisis. House prices increased most in the low-priced tier of the market during the expansion, which prompted lenders and investors in mortgage-backed securities to finance highly leveraged purchases in this segment of the market. But house prices also decline most in the low-priced tier during a contraction or collapse, among borrowers with inadequate assets and income to absorb the decline in their home values if forced to sell their homes. Consequently, their losses were transmitted into the financial sector, with an impact far more devastating than in any crisis since the depression. In order to address this structural vulnerability of the residential real estate market, several problems with incentives and information disclosure at almost every stage in the lending and securitization process need to be addressed, including the incentives of home buyers, loan originators, loan servicers, bond rating firms, investment banks, and credit enhancement providers. Alternatively, many of the problems with risk assessment may need to be transferred to investors, who have a clear incentive to gather information and assess risks, and can discipline lenders by directing capital to those lenders who adequately manage lending risks.

Price Dynamics in an Exchange Economy

The pure exchange model is the foundation of the neoclassical theory of value, yet equilibrium predictions and models of price adjustment for this model remained untested prior to the experiment reported in this paper. With the exchange economy replicated several times, prices and allocations converge sharply to the competitive equilibrium in continuous double auction (CDA) trading. Convergence is evaluated by comparing the extent of price adjustment within each market replication (or trading period) to the extent of adjustment across trading periods: most observed price adjustment occurs within trading periods, so price adjustment data are evaluated with the Hahn process model (Hahn and Negishi [1962]), which is a disequilibrium model of within-period trades. Estimation demonstrates that the model is consistent with observed price paths within each period of the exchange economy. The model is augmented with an additional assumption – based on observations from this experiment – that the initial trade price in period t+1 is randomly drawn from the interval between the minimum and maximum trade prices in period t. The estimated within-period adjustment rule, combined with this across-period adjustment rule, generates price paths similar to data from an experiment session.Competitive equilibrium, disequilibrium dynamics, continuous double auction, experimental economics, exchange economy, Hahn process, neoclassical theory of value, tatonnement, unit root tests

The Strategic Impact of Pace in Double Auction Bargaining

This paper evaluates performance of human subjects and instances of a bidding model that interact in continuous ­time double auction experiments. Asks submitted by instances of the seller model (``automated sellers'') maximize the seller's expected surplus relative to a heuristic belief function, and arrive stochastically according to an exponential distribution. Automated buyers are similar. Across experiment sessions we vary the exponential distribution parameters of automated sellers and buyers in order to assess the impact of the relative pace of asks and bids on the performance of both human subjects and the automated sellers and buyers. In these experiments, prices converge and allocations converge to efficiency, yet the split of surplus typically differs significantly from the equilibrium split. In order to evaluate the impact of pace, a statistical model is developed in which the relative performance of sellers to buyers is examined as a function of the profile of types present in each experiment session. This econometric model demonstrates that (1) human buyers outperform human sellers, (2) automated sellers and buyers with a longer expected time between asks or bids outperform faster automated sellers and buyers, and (3) the performance of the faster automated buyers is comparable to that of human buyers.Double auction, experimental economics, bounded rationality

Risk Aversion, Beliefs, and Prediction Market Equilibrium

Manski [2004] analyzes the relationship between the distribution of traders’ beliefs and the equilibrium price in a prediction market with risk neutral traders. He finds that there can be a substantial difference between the mean belief that an event will occur, and the price of an asset that pays one dollar if the event occurs and otherwise pays nothing. This result is puzzling, since these markets frequently produce excellent predictions. This paper resolves the apparent puzzle by demonstrating that both risk aversion and the distribution of traders’ beliefs significantly affect the equilibrium price. For coeffcients of relative risk aversion near those estimated in empirical studies and for plausible belief distributions, the equilibrium price is very near the traders’ mean belief.Asset pricing, beliefs, competitive equilibrium, prediction markets, risk aversion

The Edgeworth exchange formulation of bargaining models and market experiments

We construct Edgeworth exchange economies equivalent to demand and supply environments typically used in bargaining models and market experiments. This formulation clearly delineates environment, institution, and behavior for these models and experiments. To illustrate, we examine results by Gode and Sunder, who simulate random behavior in a double auction and argue that this institution leads to an efficient allocation, even in the absence of rationality. We use the Edgeworth exchange representation of their economic environment to demonstrate that they model individually rational behavior, and show that their model is a special case of theoretical results by Hurwicz, Radner, and Reiter.Double auction, Market experiment, Edgeworth exchange, Bounded rationality

Individual Rationality and Market Efficiency

The demonstration by Smith [1962] that prices and allocations quickly converge to the competitive equilibrium in the continuous double auction (CDA) was one of the first – and remains one of the most important results in experimental economics. His initial experiment, subsequent market experiments, and models of price adjustment and exchange have added considerably to our knowledge of how markets reach equilibrium, and how they respond to disruptions. Perhaps the best known model of exchange in CDA market experiments is the random behavior in the “zero-intelligence” (ZI) model by Gode and Sunder [1993]. They conclude that even without trader rationality the CDA generates efficient allocations and “convergence of transaction prices to the proximity of the theoretical equilibrium price,” provided only that agents meet their budget constraints. We demonstrate that – by any reasonable measure – prices don’t converge in their simulations. Their budget constraint requires that a buyer’s currency never exceeds her value for the commodity, which is an unnatural restriction. Their conclusion that market efficiency results from the structure of the CDA independent of traders’ profit seeking behavior rests on their claim that the constraints that they impose are a part of the market institution, but this is not so. We show that they in effect impose individual rationality, which is an aspect of agents' behavior. Researchers on learning in markets have been misled by their interpretation of the ZI simulations, with deleterious effects on the debate on market adjustment processes.Bounded rationality; double auction; exchange economy; experimental economics; market experiment; "zero intelligence" model

Market Dynamics in Edgeworth Exchange

Edgeworth exchange is the fundamental general equilibrium model, yet equilibrium predications and theories of price adjustment for this model remain untested. This paper reports an experimental test of Edgeworth exchange which demonstrates that prices and allocations converge sharply to the competitive equilibrium. Price convergence is evaluated with the tatonnement model, interpreted as a disequilibrium model of across- period price adjustment. Subsequently, the extent of within-period adjustment is compared to that of across-period adjustment. Since most observed price adjustment occurs within trading periods, price adjustment data is evaluated with two disequilibrium models of within- period trades. These models are the Geometric Mean model, which is formulated in this paper, and the Hahn process (Hahn and Negishi [1962]). Price dynamics from experiment sessions fit the Geometric Mean model better than the Hahn process, and in addition, the Geometric Mean model provides direction for development of an Edgeworth exchange bargaining model.Competitive equilibrium, disequilibrium dynamics, double auction, Edgeworth exchange, experimental economics, exchange economy, Hahn process, market dynamics

Prevention of infestation by Dermestes maculatus Degeer in east African dried fish by solar treatment

East African sun-dried fish infested by Dermestes maculatus were exposed to tropical sunlight at ambient temperature and analysed for insect mortality and weight losses. Solar treatment for 6 to 8 lo was highly effective for one layer of split sun-dried fish and 100% insect mortality was toted, while pest species were still present in the four layer batch. Weight losses between 1.2% and 10.2% were recorded, the top layer suffering the highest loss. The high surface temperature of 60°C caused fish to become brittle and quality losses occurred. A reduction in length of exposure/temperature is probably a presupposition for application of the method to local conditions