Paper: arXiv 2610.01562

Authors: Teemu Pennanen

Abstract

The tendency of the double auction mechanism to drive prices to competitive equilibrium has been well documented in laboratory experiments, but the phenomenon has lacked a theoretical explanation. This paper studies dynamic double auctions in a pure exchange economy where agents bid their indifference prices implied by their current holdings and preferences. We show that Walras equilibria coincide with the fixed points of the double auction and that repeated double auctions generate bounded sequences of allocations and prices whose cluster points are Walras equilibria with transfers.

Complexity vs Empirical Score

  • Math Complexity: 8.5/10
  • Empirical Rigor: 2.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: This paper presents a highly mathematical and theoretical explanation for a well-documented empirical phenomenon, offering significant novelty in its approach. However, it lacks empirical validation or backtesting, focusing purely on theoretical derivations. The clarity is good for a theoretical paper, but reproducibility is moderate due to the absence of code or data for its theoretical constructs.

Research Flowchart

  flowchart TD
    A[Research Goal: Explain Price Discovery in Double Auction] --> B{Methodology: Dynamic Double Auction Model};
    B --> C[Inputs: Pure Exchange Economy, Agent Indifference Prices];
    C --> D{Computational Process: Simulate Repeated Double Auctions};
    D --> E[Outcomes: Walras Equilibria as Fixed Points, Bounded Sequences Converge to WE with Transfers];