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Market-Based Asset Price Probability

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  • Victor Olkhov

Abstract

We consider volume weighted average price (VWAP) as the 1st market-based statistical moment and derive the dependence of higher statistical moments of price on statistical moments and correlations of the values and volumes of market trades. If all trade volumes are constant during the averaging interval, then the market-based statistical moments equal the frequency-based. We approximate market-based probability of price by a finite number of statistical moments. The use of VWAP results in zero price-volume correlations. We derive the expressions of market-based correlations between prices and squares of trade volumes and between squares of prices and volumes. To forecast market-based averages and volatility of asset prices, one should predict two statistical moments and the correlation of their trade values and volumes. We explain how that limits the number of predicted statistical moments of prices by the first two and limits the accuracy of the forecasts of the probability of asset prices by the accuracy of the Gaussian approximations. To improve the accuracy and reliability of large macroeconomic and market models like those developed by BlackRock's Aladdin, JP Morgan, and the U.S. Fed., the developers should use market-based statistical moments of asset prices.

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  • Victor Olkhov, 2022. "Market-Based Asset Price Probability," Papers 2205.07256, arXiv.org, revised Dec 2024.
    • Handle: RePEc:arx:papers:2205.07256
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    Cited by:

    1. Olkhov, Victor, 2024. "Lower bounds of uncertainty and upper limits on the accuracy of forecasts of macroeconomic variables," MPRA Paper 121628, University Library of Munich, Germany.
    2. Victor Olkhov, 2023. "Economic Complexity Limits Accuracy of Price Probability Predictions by Gaussian Distributions," Papers 2309.02447, arXiv.org, revised Apr 2024.
    3. Olkhov, Victor, 2022. "Market-Based Price Autocorrelation," MPRA Paper 120288, University Library of Munich, Germany, revised 26 Feb 2024.
    4. Olkhov, Victor, 2023. "Economic Theory as Successive Approximations of Statistical Moments," MPRA Paper 118722, University Library of Munich, Germany.
    5. Victor Olkhov, 2022. "Why Economic Theories and Policies Fail? Unnoticed Variables and Overlooked Economics," Papers 2208.07839, arXiv.org.

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    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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