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84
Computation in a Distributed Information Market
, 2003
"... According to economic theory, supported by empirical and laboratory evidence, the equilibrium price of a financial security reflects all of the information regarding the security's value. We investigate the dynamics of the computational process on the path toward equilibrium, where information dis ..."
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Cited by 22 (4 self)
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According to economic theory, supported by empirical and laboratory evidence, the equilibrium price of a financial security reflects all of the information regarding the security's value. We investigate the dynamics of the computational process on the path toward equilibrium, where information distributed among traders is revealed stepby step over time and incorporated into the market price. We develop a simplified model of an information market, along with trading strategies, in order to formalize the computational properties of the process. We show that securities whose payoffs cannot be expressed as a weighted threshold function of distributed input bits are not guaranteed to converge to the proper equilibrium predicted by economic theory. On the other hand, securities whose payoffs are threshold functions are guaranteed to converge, for all prior probability distributions. Moreover, these threshold securities converge in at most n rounds, where n is the number of bits of distributed information. We also prove a lower bound, showing a type of threshold security that requires at least n/2 rounds to converge in the worst case.
Market uncertainty: correlated and sunspot equilibria in imperfectly competitive economies
 Rev. Econ. Studies
, 1991
"... An imperfectly competitive economy is very prone to market uncertainty, including uncertainty about the liquidity (or "thickness") of markets. We show, in particular, that there exist stochastic equilibrium outcomes in nonstochastic market games if (and only if) the endowments are not Pareto optimal ..."
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Cited by 19 (6 self)
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An imperfectly competitive economy is very prone to market uncertainty, including uncertainty about the liquidity (or "thickness") of markets. We show, in particular, that there exist stochastic equilibrium outcomes in nonstochastic market games if (and only if) the endowments are not Pareto optimal. We also provide a link between extrinsic uncertainty arising in games (e.g. correlated equilibria) and extrinsic uncertainty in market economies (e.g. sunspot equilibria). A correlated equilibria to the market game is either a sunspot equilibrium or a nonsunspot equilibrium to the related securities games, but the converse is not true in general. 1.
Proportional response dynamics leads to market equilibrium
 In STOC
"... One of the main reasons of the recent success of peer to peer (P2P) file sharing systems such as BitTorrent is its builtin titfortat mechanism. In this paper, we model the bandwidth allocation in a P2P system as an exchange economy and study a titfortat dynamics, namely the proportional respons ..."
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Cited by 18 (1 self)
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One of the main reasons of the recent success of peer to peer (P2P) file sharing systems such as BitTorrent is its builtin titfortat mechanism. In this paper, we model the bandwidth allocation in a P2P system as an exchange economy and study a titfortat dynamics, namely the proportional response dynamics, in this economy. In a proportional response dynamics each player distributes its good to its neighbors proportional to the utility it received from them in the last period. We show that this dynamics not only converges but converges to a market equilibrium, a standard economic characterization of efficient exchanges in a competitive market. In addition, for some classes of utility functions we consider, it converges much faster than the classical tâtonnement process and any existing algorithms for computing market equilibria. As a part of our proof we study the double normalization of a matrix, an operation that linearly scales the rows of a matrix so that each row sums to a prescribed positive number, followed by a similar scaling of the columns. We show that the double normalization process of any nonnegative matrix always converges. This complements the previous studies in matrix scaling that has focused on the convergence condition of the process when the row and column normalizations are considered as separate steps. 1
A parimutuel market microstructure for contingent claims’, at http://www.stern.nyu.edu/networks/Parimutuel.pdf
, 2003
"... Parimutuel principles are widely used as an alternative to fixed odds gambling in which a bookmaker acts as a dealer by quoting fixed rates of return on specified wagers. A parimutuel game is conducted as a call auction in which odds are allowed to fluctuate during the betting period until the betti ..."
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Cited by 16 (0 self)
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Parimutuel principles are widely used as an alternative to fixed odds gambling in which a bookmaker acts as a dealer by quoting fixed rates of return on specified wagers. A parimutuel game is conducted as a call auction in which odds are allowed to fluctuate during the betting period until the betting period is closed or the auction ‘called’. The prices or odds of wagers are set based upon the relative amounts wagered on each risky outcome. In financial microstructure terms, trading under parimutuel principles is characterised by (1) call auction, noncontinuous trading; (2) riskless funding of claim payouts using the amounts paid for all of the claims during the auction; (3) special equilibrium pricing conditions requiring the relative prices of contingent claims equal the relative aggregate amounts wagered on such claims; (4) endogenous determination of unique state prices; and (5) higher efficiency. Recently, a number of large investment banks have adopted a parimutuel mechanism for offering contingent claims on various economic indices, such as the US Nonfarm payroll report and Eurozone Harmonised inflation. Our paper shows how the market microstructure incorporating parimutuel principles for contingent claims which allows for notional transactions, limit orders, and bundling of claims across states is constructed. We prove the existence of a unique price equilibrium for such a market and suggest an algorithm for computing the equilibrium. We also suggest that for a broad class of contingent claims, that the parimutuel microstructure recently deployed offers many advantages over the dominant dealer and exchange continuous time mechanisms.
Comparing the robustness of trading systems to higherorder uncertainty
 Review of Economic Studies
, 1996
"... Abstract: This paper compares the performance of a decentralized market with that of a dealership market when traders have differential information. Trade occurs as a result of equilibrium actions in a Bayesian game, where uncertainty is captured by a finite state space and information is represente ..."
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Cited by 15 (3 self)
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Abstract: This paper compares the performance of a decentralized market with that of a dealership market when traders have differential information. Trade occurs as a result of equilibrium actions in a Bayesian game, where uncertainty is captured by a finite state space and information is represented by partitions on this space. In the benchmark case of trade with common knowledge of endowments, the two mechanisms deliver virtually identical outcomes. However, with differential information, the dealership market has strictly higher trading volume, and yields an efficient posttrade allocation in most states. In contrast, the decentralized market suffers from suboptimal trading volume. The reason for this poor performance is the vulnerability of the decentralized market to higher order uncertainty concerning the fundamentals of the market. Traders may know that mutually beneficial trade is feasible, and perhaps know that they know, and yet a failure of common knowledge that this is so precludes efficient trade. The dealership market is robust to this type of uncertainty. * I would like to record my debt to Stephen Morris for shaping my views on the issues raised here. Ian Jewitt, as managing editor, and three referees guided this paper through several revisions, and I am grateful to them for their perseverance. I am especially grateful to one of the referees for pointing to the importance of limit orders in modifying the results reported here. I have gained from the comments of Helmut Bester, Katie
Efficiency of ScalarParameterized Mechanisms
"... We consider the problem of allocating a fixed amount of an infinitely divisible resource among multiple competing, fully rational users. We study the efficiency guarantees that are possible when we restrict to mechanisms that satisfy certain scalability constraints motivated by large scale communica ..."
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Cited by 15 (2 self)
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We consider the problem of allocating a fixed amount of an infinitely divisible resource among multiple competing, fully rational users. We study the efficiency guarantees that are possible when we restrict to mechanisms that satisfy certain scalability constraints motivated by large scale communication networks; in particular, we restrict attention to mechanisms where users are restricted to onedimensional strategy spaces. We first study the efficiency guarantees possible when the mechanism is not allowed to price differentiate. We study the worstcase efficiency loss (ratio of the utility associated with a Nash equilibrium to the maximum possible utility), and show that the proportional allocation mechanism of Kelly (1997) minimizes the efficiency loss when users are price anticipating. We then turn our attention to mechanisms where price differentiation is permitted; using an adaptation of the VickreyClarkeGroves class of mechanisms, we construct a class of mechanisms with onedimensional strategy spaces where Nash equilibria are fully efficient. These mechanisms are shown to be fully efficient even in general convex environments, under reasonable assumptions. Our results highlight a fundamental insight in mechanism design: when the pricing flexibility available to the mechanism designer is limited, restricting the strategic flexibility of bidders may actually improve the efficiency guarantee.
Beyond Search: Fiat Money in Organized Exchange
 International Economic Review
, 2000
"... Abstract: A model of fiat money is constructed in which spatial separation and the logistics of communication are made explicit as in search theory, but in which exchange is organized by profitseeking business enterprises as in all market economies. Firms mitigate search costs by opening shops that ..."
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Cited by 12 (0 self)
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Abstract: A model of fiat money is constructed in which spatial separation and the logistics of communication are made explicit as in search theory, but in which exchange is organized by profitseeking business enterprises as in all market economies. Firms mitigate search costs by opening shops that are easily located. Equilibria may exist in which fiat money is used as a universal medium of exchange. When a monetary equilibrium exists, fiat money is essential. The model provides a foundation to cashinadvance theory, without specifying in advance that one object will be used as the universal medium of exchange JEL Classification: E40
Asymmetric information in a competitive market game: Reexamining the implications of rational expectations
, 1997
"... We examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders. Here we reexamine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices, the advant ..."
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Cited by 11 (2 self)
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We examine price formation in a simple static model with asymmetric information, an infinite number of risk neutral traders and no noise traders. Here we reexamine four results associated with rational expectations models relating to the existence of fully revealing equilibrium prices, the advantage of becoming informed, the costly acquisition of information, and the impossibility of having equilibrium prices with higher volatility than the underlying fundamentals.