Rice University
Liquid Markets: An Empirical Analysis of a Water Exchange
Time: 12:10pm-1:30pm
Location: 241 Giannini (please bring your own lunch)
Abstract: This paper empirically analyzes the performance of one of the world’s most developed water exchanges, which operates as a primitive limit order market. Upon modeling participants’ incentives to shade their order prices and their choice between limit and market orders, I identify the distribution of participants’ willingness to pay (or accept) from the observed orders and trades. The model flexibly allows for dynamics, risk aversion, and default behavior. Counterfactual simulations suggest the observed exchange attains substantially lower trade surplus than periodic uniform-price market clearing. Droughts exacerbate the gap in surplus per unit traded. The exchange exhibits noticeable price dispersion, which enables suboptimal buyer-seller matching and incentivizes price shading.