Game Theoretic Bidding Model: Strategic Aspects of Price Formation at Stock Markets

V. Domansky and V. Kreps
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V. Domansky: St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences, St. Petersburg, Russia
V. Kreps: St. Petersburg Institute for Economics and Mathematics, Russian Academy of Sciences, St. Petersburg, Russia

Journal of the New Economic Association, 2011, issue 11, 39-62

Abstract: We consider a simplified model of finance market where two players carry on direct multistage bidding with risky assets (shares). One of the players (the insider) is informed on the liquidation price of a share, the other player knows its probability distribution only. It is shown that the optimal strategy of the insider generates a symmetric random walk of prices of transactions. The result confirms the conjecture on the strategic origin of regular stochastic fluctuations of stock market prices.

Keywords: multistage bidding; asymmetric information; random walk; repeated games; optimal strategy (search for similar items in EconPapers)
JEL-codes: C73 D44 D82 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:nea:journl:y:2011:i:11:p:39-62

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