Competition and Equilibration in Financial Markets

Citation

Asparouhova, Elena Nikolaeva (2004) Competition and Equilibration in Financial Markets. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/0tkk-2n39. https://resolver.caltech.edu/CaltechETD:etd-06102004-231222

Abstract

The research presented in this thesis aims at understanding some of the principles by which aggregate patterns in competitive markets emerge as a result of the interactions between economic agents. Experiments are used in every step as a bridge between theory and its target applications. Each of the three self-contained chapters focuses on a different aspect of equilibrium or equilibration in a competitive framework.

The objective of the first chapter is to examine the validity of the Rothschild-Stiglitz' equilibrium in the context of a simple model of lending under adverse selection. In experiments I develop a particular market structure and study to what extent it generates the theoretical predictions. In the baseline part of the study where equilibrium exists, the outcomes of the theory are strongly supported by the data. The inconclusive findings from the controversial non-existence of equilibrium part of the study lead to the idea that perhaps instead of judging models by whether their outcome predictions are observed, a step back should be made and the basic principles that are in place independent of the final outcome should be studied. Discovering several such basic principles in the data is the objective of the second chapter of this thesis. In the context of lending, the main finding is that lenders introduce contracts that are sometimes very different from the contracts already offered in the marketplace, thus rejecting the hypothesis of local dynamics.

In the third chapter experimental evidence that security prices do not respond to pressure from their own excess demand, unlike the traditional Walrasian tatonnement model predicts, is presented. Instead, prices respond to excess demand of all securities, despite the absence of a direct link between markets. A model of price pressure that explains these findings is proposed.

Thesis Files