A Bayesian viewpoint on the price formation process

Joffrey Derchu

Papers from arXiv.org

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.

Date: 2020-12, Revised 2021-09
New Economics Papers: this item is included in nep-mst
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