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Game Theoretic Bidding Model: Strategic Aspects of Price Formation at Stock Markets

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Author Info

  • Domansky, V.

    (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences, St. Petersburg, Russia)

  • Kreps, V.

    (St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences, St. Petersburg, Russia)

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    Abstract

    We consider a simplified model of finance market where two players carry on direct multistage bidding with risky assets (shares). One of the players (the insider) is informed on the liquidation price of a share, the other player knows its probability distribution only. It is shown that the optimal strategy of the insider generates a symmetric random walk of prices of transactions. The result confirms the conjecture on the strategic origin of regular stochastic fluctuations of stock market prices.

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    File URL: http://www.econorus.org/repec/journl/2011-11-39-62r.pdf
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    Bibliographic Info

    Article provided by New Economic Association in its journal Journal of the New Economic Association.

    Volume (Year): (2011)
    Issue (Month): 11 ()
    Pages: 39-62

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    Handle: RePEc:nea:journl:y:2011:i:11:p:39-62

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    Related research

    Keywords: multistage bidding; asymmetric information; random walk; repeated games; optimal strategy;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Victor C. Domansky & Victoria L. Kreps, 2009. "Repeated games with asymmetric information and random price fluctuations at finance markets : the case of countable state space," Post-Print halshs-00390701, HAL.
    2. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Hadiza Moussa Saley & Bernard De Meyer, 2003. "On the strategic origin of Brownian motion in finance," International Journal of Game Theory, Springer, vol. 31(2), pages 285-319.
    4. Victor Domansky, 2007. "Repeated games with asymmetric information and random price fluctuations at finance markets," International Journal of Game Theory, Springer, vol. 36(2), pages 241-257, October.
    5. MERTENS , Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part B : The Central Results," CORE Discussion Papers 1994021, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. MERTENS, Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part C : Further Developments," CORE Discussion Papers 1994022, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. MERTENS , Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part A : Background Material," CORE Discussion Papers 1994020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Victor C. Domansky & Victoria L. Kreps, 2009. "Repeated games with asymmetric information and random price fluctuations at finance markets : the case of countable state space," Documents de travail du Centre d'Economie de la Sorbonne 09040, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised May 2009.
    9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
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    Cited by:
    1. Victor Domansky & Victoria Kreps, 2012. "Game-theoretic model of financial markets with two risky assets," HSE Working papers WP BRP 16/EC/2012, National Research University Higher School of Economics.

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