Excess Demand And Equilibration In Multi-Security Financial Markets: The Empirical Evidence

Price dynamics are studied in a dataset of more than 11,000 transactions from twelve large-scale financial markets experiments with multiple risky securities. The aim is to determine whether a few simple principles govern equilibration. We first ask whether price changes are driven by excess demand as usually assumed in stability analysis of general equilibrium. The data strongly support this conjecture. Second, we investigate the presence of cross-security effects (the excess demands of other securities influence price changes of a security beyond its own excess demand), which have generally been assumed away in competitive stability analysis. We find systematic cross-security effects, despite the fact that transactions in one market cannot be made conditional on events in other markets. Their presence potentially upsets stability of the price discovery process, but stability is never found to be compromised in our data. We do discover a curious relationship between the signs of the cross-effects and the signs of the covariances of the payoffs of the corresponding securities. E.g., when the payoff on two securities are negatively correlated, one security’s price changes tend to be negatively correlated with the other security’s excess demands as well. Next, we investigate whether the book (the set of posted limit orders) plays a role in the process by which excess demand becomes reflected in transaction price changes. We find strong correlation between excess demands and a weighted average of the quotes in the book. The correlation is far from perfect, and we document that our weighted average of the quotes in the book explains part of the variance of transaction price changes that is unaccounted for by excess demands. This suggests that deviations of the shape of the book from excess demand cause delays in market equilibration or generate price changes even after reaching equilibrium.