From Walras' auctioneer to continuous time double auctions: A general dynamic theory of supply and demand

Jonathan Donier and Jean-Philippe Bouchaud

Papers from arXiv.org

Abstract: In standard Walrasian auctions, the price of a good is defined as the point where the supply and demand curves intersect. Since both curves are generically regular, the response to small perturbations is linearly small. However, a crucial ingredient is absent of the theory, namely transactions themselves. What happens after they occur? To answer the question, we develop a dynamic theory for supply and demand based on agents with heterogeneous beliefs. When the inter-auction time is infinitely long, the Walrasian mechanism is recovered. When transactions are allowed to happen in continuous time, a peculiar property emerges: close to the price, supply and demand vanish quadratically, which we empirically confirm on the Bitcoin. This explains why price impact in financial markets is universally observed to behave as the square root of the excess volume. The consequences are important, as they imply that the very fact of clearing the market makes prices hypersensitive to small fluctuations.

Date: 2015-06
New Economics Papers: this item is included in nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://arxiv.org/pdf/1506.03758 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1506.03758

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().