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On the strategic origin of Brownian motion in finance

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  • DE MEYER, Bernard
  • MOUSSA SALEY, Hadiza

Abstract

This paper is concerned with the stategic use of a private information on the stock market. A repeated auction model is used to analyze the evolution of the price system on a market with asymmetric information. The model turns out to be a zero-sum repeated game with one-sided information, as introduced by Aumann and Maschler. The stochastic evolution of the price system can be explicitly computed in the n times repeated case. As n grows to [infinite] , this process tends to a continuous time martingale related to a Brownian Motion. This paper provides in this way an endogenous justification for the appearance of Brownian Motion in Finance theory.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000057.

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Date of creation: 00 Dec 2000
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Handle: RePEc:cor:louvco:2000057

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References

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  1. Calcagno, Riccardo & Lovo, Stefano M., 1998. "Bid-Ask Price Competition with Asymmetric Information between Market Makers," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1998012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. MERTENS, Jean-François & ZAMIR, Shmuel, 1995. "Incomplete Information Games and the Normal Distribution," CORE Discussion Papers 1995020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. CALCAGNO, Riccardo & LOVO, Stefano M., 1998. "Bid-ask price competition with asymmetric information between market makers," CORE Discussion Papers 1998016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Mertens, J.-F., 1986. "Repeated games," CORE Discussion Papers 1986024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. De Meyer, Bernard, 2010. "Price dynamics on a stock market with asymmetric information," Games and Economic Behavior, Elsevier, vol. 69(1), pages 42-71, May.
  2. Alexandre Marino & Bernard De Meyer, 2005. "Continuous versus Discrete Market Games," Cowles Foundation Discussion Papers 1535, Cowles Foundation for Research in Economics, Yale University.
  3. Domansky, V. & Kreps, V., 2011. "Game Theoretic Bidding Model: Strategic Aspects of Price Formation at Stock Markets," Journal of the New Economic Association, New Economic Association, issue 11, pages 39-62.
  4. 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.
  5. Giraud, Gael, 2003. "Strategic market games: an introduction," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 355-375, July.
  6. Johannes Horner & Julian Jamison, 2006. "Private Information in Sequential Common-Value Auctions," Discussion Papers 1422, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. repec:hal:journl:halshs-00390625 is not listed on IDEAS

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