The Effect of Trading Period Duration on Market Performance in Experimental Financial Markets

The experimental asset market literature provides strong evidence concerning the robust convergence of transaction prices to the competitive equilibrium price and the high percentage of gains from trade exhausted in double auction (DA) markets. However, the designs of previous experimental asset market studies have incorporated trading period durations that are constant and known to the trading participants. Friedman (1984, p. 71) suggests that the predetermined, known time at which trade will cease is one of a number of institutional features of experimental DA markets that enhance the informational and competitive efficiency of observed outcomes. The intention here is to extend previous work (Duxbury, 1997) by conducting a series of experiments designed to determine the importance of trading period duration on observed market performance. To this end, markets are conducted with either constant and known (CK), variable and known (VK) or variable and unknown (VU) trading period durations. The VK treatment represents a novel feature of the experimental design, allowing the analysis to differentiate between the effects of variable trading period duration and uncertain trading period duration. The few theoretical models of bid, ask and transaction price behavior in experimental DA markets developed to date rely on assumptions concerning the time remaining until the end of trade (see for example Friedman, 1991).