Trading Game Research Articles

Asymmetric information in bilateral trade and in markets: An inversion result

Abstract I consider bilateral trade between a seller and a buyer with private valuations. The seller makes a take-it-or-leave-it price offer. If the seller observes the buyerʼs valuation (symmetric information), bilateral trade is trivially efficient. If the seller cannot observe the valuation (asymmetric information), bilateral trade is inefficient. This bilateral trading game is embedded into a large matching market. In the steady-state equilibrium of the market game, the relation between the informational regime and efficiency is inverted: With small frictions efficiency obtains if information is asymmetric. If information is symmetric, however, the trading outcome can be very inefficient—even if frictions vanish.

Information disclosure with leakages

We present a trading game with one insider, many outsiders, liquidity traders and a competitive market maker trading an asset with two value components, a private and a shared one, in a market operating as in Kyle (1985). The insider knows both value components and outsiders only know the shared component. The market maker receives a private signal in the form of a noisy transformation of the shared component, which we refer to as leakages. Before trade begins, the insider can disclose the value of the shared component to the entire market, thus removing the outsiders from the game. When the market maker's signal is sufficiently precise, the insider's benefit from knowing the shared component does not exceed the cost of concurrently trading with the outsiders, thus motivating the insider to reveal the shared component to the entire market. This result provides an explanation as to why some firm managers may naturally prefer to publicly disclose information rather than leaving it in the hands of select investors.

Expectations, Liquidity, and Short-Term Trading

Short-termism need not breed informational price inefficiency even when generating Beauty Contests. We demonstrate this claim in a two-period market with persistent liquidity trading and risk-averse, privately informed, short-term investors and find that prices reflect average expectations about fundamentals and liquidity trading. Informed investors engage in retrospective learning to reassess inferences (about fundamentals) made during the trading game's early stages. This behavior introduces strategic complementarities in the use of information and can yield two stable equilibria that can be ranked in terms of liquidity, volatility, and informational efficiency. We derive implications that explain market anomalies as well as empirical regularities.

Global Climate Games: How Pricing and a Green Fund Foster Cooperation

The international game of cap and trade begins when countries choose their quantity targets, which are largely selected according to self interest. The analogous public-goods game, in which countries choose their abatement levels, has an uncooperative outcome. Compared to that, the Nash equilibrium of the cap-and-trade game shows that abatement can increase but that trade provides opportunities for uncooperative behavior. By contrast, a game in which all countries vote for a global quantity target or a global price target can lead to a highly cooperative choice of target. However, the assignment of responsibilities for a global quantity target stymies implementation of a global cap. The global-price-target game largely overcomes this barrier because a uniform global price provides a focal point for cooperation. However low-emission countries apparently prefer a much lower global-price than more prosperous countries unless a Green Fund is implemented. A game that couples such a fund to the global price target can largely overcome this barrier to cooperation. We describe such a game along with its equilibrium outcome, which promises to be inexpensive and cooperative.

Development of “Emission Trading Game”: A Tool for Observing the Process of Shared Social Reality in a Social Dilemma Situation

Development of “Emission Trading Game”: A Tool for Observing the Process of Shared Social Reality in a Social Dilemma Situation

The world of Pokemon: A dynamic ecological classification system.

The stimulus for this paper was the recent ISKO 2000 conference in Toronto where papers were presented on exotic classification systems (Olson 2000), ecological work-based classification schemes (Albrechtsen 2000; Pejtersen and Albrechtsen 2000) and self-organizing environments (Dron et al. 2000). The world of Pokermon combines all three ofthese approaches to understanding classification. Because the Pokemon trading game is heavily merchandised and widely played, it has generated a global cohort of young players who have been introduced to classificatory principles through their participation in the game. We propose that their understanding of classification should be explored further, as it may provide insight into the appropriation of mediated worlds in other modalities like the web.

Changing pedagogical styles: a case study of The Trading Game in a Japanese university

Even in recent times, students in Japanese universities have few opportunities to work in groups and interact with their peers. The purpose of this study was to examine interpersonal games and to investigate the significance of introducing a participatory style of teaching in the context of higher education in Japan. In particular, the study aimed to investigate the significance of students' experiences with regard to this style of teaching. The Trading Game was played by students of undergraduate courses in Daito Bunka University in Japan over a period of three years. The results revealed the following: (1) students showed an increased understanding of the realities of the global economy; (2) greater interactions were observed in the participatory style of teaching, as compared with conventional teaching; and (3) the students realised the importance of developing a broader outlook.

Trade & Cap: A customer-managed, market-based system for trading bandwidth allowances at a shared link

We propose Trade & Cap (T&C), an economics-inspired mechanism that incentivizes users to voluntarily coordinate their consumption of the bandwidth of a shared resource ( e.g., a DSLAM link) so as to converge on what they perceive to be an equitable allocation, while ensuring efficient resource utilization. Under T&C, rather than acting as an arbiter, an Internet Service Provider (ISP) acts as an enforcer of what the community of rational users sharing the resource decides is a fair allocation of that resource. Our T&C mechanism proceeds in two phases. In the first, software agents acting on behalf of users engage in a strategic trading game in which each user agent selfishly chooses bandwidth slots to reserve in support of primary, interactive network usage activities. In the second phase, each user is allowed to acquire additional bandwidth slots in support of a presumed open-ended need for fluid bandwidth, catering to secondary applications. The acquisition of this fluid bandwidth is subject to the remaining “buying power” of each user and by prevalent “market prices” – both of which are determined by the results of the trading phase and a desirable aggregate cap on link utilization. We present analytical results that establish the underpinnings of our T&C mechanism, including game-theoretic results pertaining to the trading phase, and pricing of fluid bandwidth allocation pertaining to the capping phase. Using real network traces, we present extensive experimental results that demonstrate the benefits of our scheme, which we also show the salient features of an efficient implementation architecture, settling the basis for a practical implementation of the system.

Pareto Improvements To Free Trade In An Infinitely Repeated Dynamic Game

In an infinitely repeated intraindustry trade game governments improve on the static prisoners dilemma outcome of the Brander and Spencer (1985) trade policy. When firms collude as joint monopolist governments reach the Pareto frontier of their feasible and individually rational set (FIRS) using a policy of free trade. Free trade and collusion will place firms on the Pareto frontier of their effective feasible and individually rational set (EFIRS). Without collusion free trade forces governments and firms inside their respective FIRS and EFIRS. We demonstrate that without collusion governments return to the Pareto frontier of their FIRS only when taxing exports.

Cost-Reducing R&D with Spillovers and Trade

This article incorporates research spillovers and examines behavior of firms in a two-stage, international trade game with process innovation. Governments choose optimal research subsidies in stage 1, and firms take account of the subsidies in choosing research and production in stage 2. Results show that optimal research subsidies differ under spillovers and no spillovers. Strategic responses to foreign research subsidies uniquely occur in cases with spillovers. At certain spillover levels, the optimal R&D policy is a negative subsidy (tax). Findings regarding the effects of trade liberalization support earlier results with perfect appropriability, although the responses to trade liberalization are different with spillovers.

Pollution Permits, Strategic Trading and Dynamic Technology Adoption

This paper analyzes the dynamic incentives for technology adoption under a transferable permits system, which allows for strategic trading on the permit market. Initially, firms can invest both in low-emitting production technologies and trade permits. In the model, technology adoption and allowance price are generated endogenously and are interdependent. It is shown that the non-cooperative permit trading game possesses a pure-strategy Nash equilibrium, where the allowance value rejects the level of uncovered pollution (demand), the level of unused allowances (supply), and the technological status. These conditions are also satisfied when a price support instrument, which is contingent on the adoption of the new technology, is introduced. Numerical investigation confirms that this policy generates a floating price floor for the allowances, and it restores the dynamic incentives to invest. Given that this policy comes at a cost, a criterion for the selection of a self-financing policy (based on convex risk measures) is proposed and implemented.

Pollution Permits, Strategic Trading and Dynamic Technology Adoption

This paper analyzes the dynamic incentives for technology adoption under a transferable permits system, which allows for strategic trading on the permit market. Initially, firms can invest both in low-emitting production technologies and trade permits. In the model, technology adoption and allowance price are generated endogenously and are inter-dependent. It is shown that the non-cooperative permit trading game possesses a pure-strategy Nash equilibrium, where the allowance value reflects the level of uncovered pollution (demand), the level of unused allowances (supply), and the technological status. These conditions are also satisfied when a price support instrument, which is contingent on the adoption of the new technology, is introduced. Numerical investigation confirms that this policy generates a floating price floor for the allowances, and it restores the dynamic incentives to invest. Given that this policy comes at a cost, a criterion for the selection of a self-financing policy (based on convex risk measures) is proposed and implemented.

Kyoto's Climate Game and How to Fix it

The Kyoto summit initiated an international game of cap and trade. Unlike a national policy, the essence of this game is the self-selection of national emission targets. This differs from the standard global public-goods game because targets are met in the context of a global carbon market. This changes the outcome of the notoriously uncooperative public-goods game.The equilibrium of the new game may increase or decrease total abatement. If it increases abatement the resulting carbon price will be no greater than the average public-goods price. Typically, high abaters in the public goods game will target more abatement in the cap-and-trade game, while low abaters will target less.Given such a dismal outcome the policy game should be changed to the global price-target game. In the same setting where cap-and-trade reduces abatement, this game induces optimal abatement. But, realistically, it must include a Green Fund whose strength is linked to the price target. This will induce poor countries to favor as high a price target as rich countries, reversing the polarizing and anti-cooperative tendencies of cap and trade.

Multistep Bayesian Strategy in Coin-Tossing Games and Its Application to Asset Trading Games in Continuous Time

We study multistep Bayesian betting strategies in coin-tossing games in the framework of game-theoretic probability of Shafer and Vovk [12]. We show that by a countable mixture of these strategies, a gambler or an investor can exploit arbitrary patterns of deviations of nature's moves from independent Bernoulli trials. We then apply our scheme to asset trading games in continuous time and derive the exponential growth rate of the investor's capital when the variation exponent of the asset price path deviates from two.

Trading Game Invariance in the TAQ Dataset

The trading game invariance hypothesis of Kyle and Obizhaeva (2011a) is tested using the Trades and Quotes (“TAQ”) dataset. Over the period 1993-2001, the estimated monthly regression coefficients of the log of trade arrival rate on the log of trading activity has an almost constant value of 0.690, slightly higher than the value of 2/3 predicted by the invariance hypotheses. Over the period 2001-2008, the coefficient estimates rise almost linearly, with an average value of 0.787. Average trade size, normalized for trading activity, falls dramatically over the period 1993-2008. The distribution of trade size adjusted for trading activity resembles a log-normal more closely in 1993 than in 2001 or 2008, with truncation below the 100-share odd-lot boundary becoming a more prominent feature over time. These results suggests that the 2001 reduction in minimum tick size to one cent and the subsequent increase in algorithmic trading have resulted in more intense order shredding in actively traded stocks than inactively traded stocks. The invariance hypothesis explains 91% of the cross-sectional variation in print arrival rates and average print size.

Business and Market Intelligence 2.0, Part 2

Financial markets provide a forum for trading assets and money, but more fundamentally, they are about trading information. The advent of the Internet changed the trading game by making market information instantly available to many more people, spawning a large population of day traders, bloggers, and market speculators. Information generation and analysis, long the province of well-funded, large financial institutions, has become fair game for all, even people with limited means, from college students to retirees. Information in the finance Web is unstructured, leading to some frustration in getting clean data for research.

Thinking about Agricultural Trade and Food Safety by the Trading Game

Thinking about Agricultural Trade and Food Safety by the Trading Game

A new formulation of asset trading games in continuous time with essential forcing of variation exponent

We introduce a new formulation of asset trading games in continuous time in the framework of the game-theoretic probability established by Shafer and Vovk (Probability and Finance: It’s Only a Game! (2001) Wiley). In our formulation, the market moves continuously, but an investor trades in discrete times, which can depend on the past path of the market. We prove that an investor can essentially force that the asset price path behaves with the variation exponent exactly equal to two. Our proof is based on embedding high-frequency discrete-time games into the continuous-time game and the use of the Bayesian strategy of Kumon, Takemura and Takeuchi (Stoch. Anal. Appl. 26 (2008) 1161–1180) for discrete-time coin-tossing games. We also show that the main growth part of the investor’s capital processes is clearly described by the information quantities, which are derived from the Kullback–Leibler information with respect to the empirical fluctuation of the asset price.

A ‘Knowledge Trading Game’ for collaborative design learning in an architectural design studio

Knowledge-sharing and resource exchange are the key to the success of collaborative design learning. In an architectural design studio, design knowledge entails learning efforts that need to accumulate and recombine dispersed and complementary pieces of knowledge. In this research, firstly, ‘Knowledge Trading Game’ is proposed to be a way for promoting students’ design knowledge exchange, dissemination and refinement. Twelve students are randomly chosen as experimental participants. And secondly, ‘virtual value’ is used for students to trade their design knowledge. In this game, students buy others’ design knowledge to extend their design problem space; students decrease their design solution space through their sold design knowledge. Finally, ‘protocol analysis’ is adapted as the research methodology to examine the results of implementation. A positive outcome is identified that Knowledge Trading Game encourages collaborative design learning.

Retaliatory Disagreement Point with Asymmetric Countries: Evidence from European Wine Sector During Enlargement

The vector space model facilitates a very useful representation of the strategic interaction in trade because it is possible to incorporate both symmetric and asymmetric features of the players. This paper characterizes the Nash solution of the non-cooperative international trade game in the orthogonal vector space. We have used the standard properties of the Nash solution to determine if the non-cooperative action-reaction trade policy space should be written in terms of 'import-import' or 'import-export' quotas as strongest punishment. The trade policy space defined by import-export' quotas is not a Nash solution of the non-cooperative game but an improvement in the disagreement set. We show the positive correlation between import and export quotas using data on trade relations between EU-15, Romania, Hungary and Bulgaria for wine sector during 1995-2005. In our model the outcome of the non-cooperative trade is autarky. Retaliation is played when countries restrict their imports to one third of the national optimum.