IEL-CDA model: A more accurate theory of behavior in continuous double auctions

Mikhail Anufriev, Jasmina Arifovic, Anil Donmez, John Ledyard and Valentyn Panchenko

Journal of Economic Dynamics and Control, 2025, vol. 172, issue C

Abstract: The continuous double auction (CDA) is a well-studied and widely used trading institution. However, there is no universally accepted theory regarding the dynamics of price formation, especially within the first period, that has endured experimental testing. In this paper, we introduce a behavioral model called IEL-CDA, which builds upon the Individual Evolutionary Learning (IEL) model of Arifovic et al. (2022). We enhance IEL by (a) incorporating Marshallian Selection, favoring traders with a higher expected surplus in making offers, and (b) allowing a trader's hypothetical reasoning to depend on the history of transactions. Using new experimental data, we test the hypothesis that efficiencies and average prices observed in the experiments follow the same distribution as those produced by simulations with various models. The hypothesis is rejected for both the Zero Intelligent theory of Gode and Sunder (1993) and IEL; however, it is not rejected for IEL-CDA. Therefore, IEL-CDA emerges as a more accurate theory of behavior in the continuous double auction.

Keywords: Continuous double auction; Learning; Evolutionary dynamics; Zero intelligence (search for similar items in EconPapers)
JEL-codes: C63 C92 D44 D82 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:172:y:2025:i:c:s0165188924000320

DOI: 10.1016/j.jedc.2024.104840

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