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Towards a Hybrid Model of Microeconomic and Financial Price Adjustment Processes: The Case of a Market with Continuously Refreshed Supply and Demand

In: Experimental Business Research

Author

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  • Paul J. Brewer

    (Hong Kong University of Science and Technology)

Abstract

Microeconomics and financial economics provide alternative models of market dynamics. A long history of laboratory results shows that market prices in the laboratory converge towards the static predictions of microeconomic theory with a resulting classical efficiency of allocation. Yet, the informational efficiency of market prices, often treated as a starting axiom for financial market theory, requires instead that current prices represent fair gambles over an unknown distribution of future prices: financial price processes are idealized as random walks with independent increments perhaps modified by some notion of heteroskedasticity such as stochastic volatility. Unlike prices following a Marshallian path, random walks do not generally converge towards an equilibrium price. The conflict between these two views of market processes is explored and a model that is a hybrid of the microeconomic and financial approaches is constructed and compared against data from laboratory markets involving continuously refreshed supply and demand.

Suggested Citation

  • Paul J. Brewer, 2005. "Towards a Hybrid Model of Microeconomic and Financial Price Adjustment Processes: The Case of a Market with Continuously Refreshed Supply and Demand," Springer Books, in: Amnon Rapoport & Rami Zwick (ed.), Experimental Business Research, chapter 0, pages 21-45, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-24243-9_2
    DOI: 10.1007/0-387-24243-0_2
    as

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