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Pricing, liquidity and the control of dynamic systems in finance and economics

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  • Willis, Geoff

Abstract

The paper discusses various practical consequences of treating economics and finance as an inherently dynamic and chaotic system. On the theoretical side this looks at the general applicability of the market-making pricing approach to economics in general. The paper also discuses the consequences of the endogenous creation of liquidity and the role of liquidity as a state variable. On the practical side, proposals are made for reducing chaotic behaviour in both housing markets and stock markets.

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File URL: http://mpra.ub.uni-muenchen.de/31137/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 31137.

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Date of creation: 26 May 2011
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Handle: RePEc:pra:mprapa:31137

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Keywords: dynamic; chaotic; liquidity; market-microstructure; post-keynesian;

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  1. Liu, Weimin, 2006. "A liquidity-augmented capital asset pricing model," Journal of Financial Economics, Elsevier, Elsevier, vol. 82(3), pages 631-671, December.
  2. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  3. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports, Federal Reserve Bank of New York 164, Federal Reserve Bank of New York.
  4. Viral V. Acharya & Lasse Heje Pedersen, 2004. "Asset Pricing with Liquidity Risk," NBER Working Papers 10814, National Bureau of Economic Research, Inc.
  5. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2004. "Market Microstructure: A Survey of Microfoundations, Empirical Results, and Policy Implications," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 253, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2002. "Order imbalance, liquidity, and market returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 65(1), pages 111-130, July.
  7. Korajczyk, Robert A. & Sadka, Ronnie, 2008. "Pricing the commonality across alternative measures of liquidity," Journal of Financial Economics, Elsevier, Elsevier, vol. 87(1), pages 45-72, January.
  8. 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.
  9. Lee, Kuan-Hui, 2005. "The World Price of Liquidity Risk," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2006-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  10. Armand Joulin & Augustin Lefevre & Daniel Grunberg & Jean-Philippe Bouchaud, 2008. "Stock price jumps: news and volume play a minor role," Papers 0803.1769, arXiv.org.
  11. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, Elsevier, vol. 56(1), pages 3-28, April.
  12. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, Elsevier, vol. 3(3), pages 205-258, August.
  13. Kurz,Heinz D. & Salvadori,Neri, 1997. "Theory of Production," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521588676.
  14. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, Elsevier, vol. 92(2), pages 153-181, May.
  15. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
  16. Amihud, Yakov & Mendelson, Haim & Pedersen, Lasse Heje, 2005. "Liquidity and Asset Prices," MPRA Paper 24768, University Library of Munich, Germany.
  17. Tarun Chordia, 2005. "An Empirical Analysis of Stock and Bond Market Liquidity," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(1), pages 85-129.
  18. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
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