UC Santa Cruz

The continuous double auction (CDA) has found itself in a state of ubiquity in today's market landscape. Such presence has motivated a vast literature on the double auction, spanning theoretical, experimental and empirical works alike. Despite the century or so of research into the underpinnings of the double auction and its many variations, much is left to discover in terms of convergence and its determinants. This dissertation investigates the driving forces of the continuous double auction institution, as well as mechanisms for equilibrium-achieving trader behavior, all set in simple general equilibrium settings.

Chapter 1 presents a model of zero intelligence trading in the continuous double auction, though set in a general equilibrium economy and unconstrained to the point of reaching a lower level of `zero' than prior literature. Much like Gode and Sunder (1993), the model's intent is not to give a prescription for what traders do in the world, but to better understand the driving power and mechanisms underlying the CDA in a more complex environment. To fully understand the implications of the model, the institution and the economic setting, I simulate several variations of the market hundreds of times.

Chapter 2 pushes further into the wilderness of bounded rationality, questioning how price accessibility in a CDA impacts trader behavior. Do they respond to orders being posted and traders being made, and if so, how? To investigate, I run a set of laboratory experiments which vary the accessibility of prices in the orderbook and transaction history. I pair the experiment with another general equilibrium adaptation of a classic CDA agent-based model (Gjerstad and Dickhaut (1998)), one which assumes traders perfectly choose orders based on their beliefs on how acceptable prices are. Chapter 3 postulates a trader behavior model which is able to encapsulate the models of Chapter 1 and 2, and also provide one mapping of the intermediate levels of minimal intelligence between them. In addition to holding beliefs on prices, traders also abide by reservations that allow for disequilibrium trade, and select orders imperfectly via logit choice.