Market Microstructure and Price Discovery

Paul Carlisle Kettler, Aleh L. Yablonski, Frank Proske

Centre of Mathematics for Applications, Department of Mathematics, University of Oslo, Oslo, Norway.
Centre of Mathematics for Applications, Department of Mathematics, University of Oslo, Oslo, Norway; Department of Functional Analysis, Mechanical and Mathematical Faculty, Belarusian State University, Minsk, Belarus.

DOI: 10.4236/jmf.2013.31001                

Abstract

The design of this study is to investigate the evolution of a stochastic price process consequent to discrete processes of bids and offers in a market microstructure setting. Under a set of flexible assumptions about agent preferences, we generate a price process to compare with observation. Specifically, we allow for both rational and irrational economic behavior, abstracting the inquiry from classical studies relying on utility theory. The goal is to provide a set of economic primitives which point inexorably to the price processes we see, rather than to assume such process from the start.

Keywords

Price Theory and Market Microstructure; Stochastic Difference Equations; Bid; Ask; Price Processes in Discrete Time

Conflicts of Interest

The authors declare no conflicts of interest.

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