Order-Driven Markets are Almost Competitive

Ritzberger, Klaus (2016) Order-Driven Markets are Almost Competitive. The Review of Economic Studies, 83 (1), pp. 338-364. https://doi.org/10.1093/restud%2Frdv031

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Abstract

This article studies a market game under uncertainty in which agents may submit multiple limit and market orders. When agents know their preferences at all states, the competitive equilibrium can be supported as a Nash equilibrium of the market game, that is, agents behave as if they were price takers. Therefore, if the associated competitive economy has a fully revealing rational expectations equilibrium, then so does the market game. This resolves the puzzle that agents behave as if prices were given, even though prices aggregate private information, at least for this “private values” case. Necessary conditions for Nash equilibrium show that the resulting allocation cannot deviate too far from a competitive equilibrium. When agents do not know their preferences at some states, though, a characterization result shows that the Nash equilibria of the market game tend to be far from competitive. (author's abstract)

Item Type: Article in Academic Journal
Keywords: Competitive equilibrium, market game, limit order book, rational expectations equilibrium
Classification Codes (e.g. JEL): C72, D47, D53, D82, G14
Research Units: Former Research Groups (until 2017) > Financial Markets and Econometrics
Date Deposited: 28 Jul 2015 06:37
Last Modified: 01 Apr 2016 14:20
DOI: 10.1093/restud/rdv031
ISSN: 0034-6527
URI: https://irihs.ihs.ac.at/id/eprint/3662

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