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

Paul J. Brewer
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Paul J. Brewer: Hong Kong University of Science and Technology

Chapter Chapter 2 in Experimental Business Research, 2005, pp 21-45 from Springer

Abstract: 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.

Keywords: Random Walk; Demand Curve; Competitive Equilibrium; Double Auction; Price Convergence (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-0-387-24243-9_2

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DOI: 10.1007/0-387-24243-0_2

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