An equilibrium model for matching impatient demand and patient supply over time
AbstractWe present a simple dynamic equilibrium model for an online exchange where both buyers and sellers arrive according to a exogenously defined stochastic process. The structure of this exchange is motivated by the limit order book mechanism used in stock markets. Both buyers and sellers are elastic in the price-quantity space; however, only the sellers are assumed to be patient, i.e. only the sellers have a price - time elasticity, whereas the buyers are assumed to be impatient. Sellers select their selling price as a best response to all the other sellers' strategies. We define and establish the existence of the equilibrium in this model and show how to numerically compute this equilibrium. We also show how to compute other relevant quantities such as the equilibrium expected time to sale and equilibrium expected order density, as well as the expected order density conditioned on current selling price. We derive a closed form for the equilibrium distribution when the demand is price independent. At this equilibrium the selling (limit order) price distribution is power tailed as is empirically observed in order driven financial markets.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number cs/0612065.
Date of creation: Dec 2006
Date of revision: Mar 2007
Contact details of provider:
Web page: http://arxiv.org/
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.:
- Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005.
"Limit Order Book as a Market for Liquidity,"
Review of Financial Studies,
Society for Financial Studies, vol. 18(4), pages 1171-1217.
- Foucault, Thierry & Kadan, Ohad & Kandel, Eugene, 2001. "Limit Order Book as a Market for Liquidity," CEPR Discussion Papers 2889, C.E.P.R. Discussion Papers.
- Thierry Foucault & Ohad Kadan & Eugene Kandel, 2003. "Limit Order Book as a Market for Liquidity," Discussion Paper Series dp321, The Center for the Study of Rationality, Hebrew University, Jerusalem.
- FOUCAULT, Thierry & KADAN, Ohad & KANDEL, Eugene, 2001. "Limit order book as a market for liquidity," Les Cahiers de Recherche 728, HEC Paris.
- Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
- J. Doyne Farmer & Paolo Patelli & Ilija I. Zovko, 2003. "The Predictive Power of Zero Intelligence in Financial Markets," Papers cond-mat/0309233, arXiv.org, revised Feb 2004.
- Jean-Philippe Bouchaud & Marc Mezard & Marc Potters, 2002. "Statistical properties of stock order books: empirical results and models," Science & Finance (CFM) working paper archive 0203511, Science & Finance, Capital Fund Management.
- Iori, G. & Daniels, M.G. & Farmer, J.D. & Gillemot, L. & Krishnamurthy, S. & Smith, E., 2003. "An analysis of price impact function in order-driven markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 146-151.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.