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Coupled mode theory of stock price formation

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  • Jack Sarkissian

Abstract

We develop a theory of bid and ask price dynamics where the two prices form due to interaction of buy and sell orders. In this model the two prices are represented by eigenvalues of a 2x2 price operator corresponding to "bid" and "ask" eigenstates. Matrix elements of price operator fluctuate in time which results in phase jitter for eigenstates. We show that the theory reflects very important characteristics of bid and ask dynamics and order density in the order book. Calibration examples are provided for stocks at various time scales. Lastly, this model allows to quantify and measure risk associated with spread and its fluctuations.

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  • Jack Sarkissian, 2013. "Coupled mode theory of stock price formation," Papers 1312.4622, arXiv.org.
  • Handle: RePEc:arx:papers:1312.4622
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    File URL: http://arxiv.org/pdf/1312.4622
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    References listed on IDEAS

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    1. Marco Avellaneda & Sasha Stoikov, 2008. "High-frequency trading in a limit order book," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 217-224.
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    Cited by:

    1. Jack Sarkissian, 2016. "Spread, volatility, and volume relationship in financial markets and market making profit optimization," Papers 1606.07381, arXiv.org.
    2. Jack Sarkissian, 2016. "Quantum theory of securities price formation in financial markets," Papers 1605.04948, arXiv.org, revised May 2016.

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