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Price equations with symmetric supply/demand; implications for fat tails

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  • Caginalp, Carey
  • Caginalp, Gunduz

Abstract

Implementing a set of microeconomic criteria, we develop price dynamics equations using a function of demand/supply with key symmetry properties. The function of demand/supply can be linear or nonlinear. The type of function determines the nature of the tail of the distribution based on the randomness in the supply and demand. For example, if supply and demand are normally distributed, and the function is assumed to be linear, then the density of relative price change has behavior x−2 for large x (i.e., large deviations). The exponent approaches −1 if the function of supply and demand involves a large exponent. The falloff is exponential, i.e., e−x, if the function of supply and demand is logarithmic.

Suggested Citation

  • Caginalp, Carey & Caginalp, Gunduz, 2019. "Price equations with symmetric supply/demand; implications for fat tails," Economics Letters, Elsevier, vol. 176(C), pages 79-82.
    • Handle: RePEc:eee:ecolet:v:176:y:2019:i:c:p:79-82
    DOI: 10.1016/j.econlet.2018.12.037
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    Cited by:

    1. Caginalp, Carey & Caginalp, Gunduz & Swigon, David, 2021. "Stochastic asset flow equations: Interdependence of trend and volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 574(C).
    2. Sarkissian, Jack, 2020. "Quantum coupled-wave theory of price formation in financial markets: Price measurement, dynamics and ergodicity," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 554(C).
    3. Caginalp, Carey & Caginalp, Gunduz, 2020. "Derivation of non-classical stochastic price dynamics equations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 560(C).
    4. Carey Caginalp & Gunduz Caginalp, 2019. "Derivation of non-classical stochastic price dynamics equations," Papers 1908.01103, arXiv.org, revised Aug 2020.
    5. Gunduz Caginalp, 2020. "Fat tails arise endogenously in asset prices from supply/demand, with or without jump processes," Papers 2011.08275, arXiv.org, revised Mar 2021.
    6. Jack Sarkissian, 2020. "Quantum coupled-wave theory of price formation in financial markets: price measurement, dynamics and ergodicity," Papers 2002.04212, arXiv.org.

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    More about this item

    Keywords

    Price dynamics; Fat tails; Supply/demand; Asset flow equations;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G4 - Financial Economics - - Behavioral Finance
    • D0 - Microeconomics - - General
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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