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A Bayesian viewpoint on the price formation process

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  • Joffrey Derchu

Abstract

We introduce a simple framework in which market participants update their prior about an efficient price with a model-based learning process. We show that exponential intensities for the arrival of aggressive orders arise naturally in this setting. Our approach allows us to fully describe market dynamics in the case with Brownian efficient price and informed market takers. We are also able to revisit the emergence of market impact due to meta-order splitting, making several connections with existing literature.

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  • Joffrey Derchu, 2020. "A Bayesian viewpoint on the price formation process," Papers 2012.15705, arXiv.org, revised Sep 2021.
    • Handle: RePEc:arx:papers:2012.15705
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    References listed on IDEAS

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    1. Aurélien Alfonsi & Pierre Blanc, 2016. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Finance and Stochastics, Springer, vol. 20(1), pages 183-218, January.
    2. Aurélien Alfonsi & Pierre Blanc, 2016. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Finance and Stochastics, Springer, vol. 20(1), pages 183-218, January.
    3. Aurélien Alfonsi & Pierre Blanc, 2016. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Post-Print hal-00971369, HAL.
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