Abstract - Informed Traders, Depth, and the Convergence of Price to Equilibrium (joint work with J. Eaves)

The Tokyo Grain Exchange uses sequences of Walrasian auctions to find prices for futures contracts. This makes it a natural laboratory to analyze the affect of information on price convergence. First, since the length of an auction is endogenous, the data offer an obvious measure of the time it takes to reach equilibrium. Second, the sequencing of auctions causes information to become more evenly dispersed as a trading session proceeds. We use thousands of auction transcripts reporting the real-time entries made by individual traders and the corresponding prices to analyze how apparently informed trades affect the speed of convergence. Consistent with theory, we find that the intensity of informed trading decreases and depth increases as an auction sequence proceeds. Finally, the rate that price impounds information is positively affected by informed trading with magnitude that decreases as an auction sequence proceeds.

Michael Melvin
Arizona State University
17.May 2005

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