Market making, price formation, and technical trading

Doyne Farmer, John Geanakoplos, and Paul Melby
Authors registered in the RePEc Author Service: J. Doyne Farmer

No 111, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: We demonstrate that achieving sensible convergence of prices to equilibrium is facilitated by market maker risk. \\ We introduce several criteria for price formation rules, and provide an example that satisfies all of them. The risk aversion of the market maker inevitably leads to price persistence that can be exploited by technical traders. \\ We conjecture that this can force a situation in which a market is informationally but not alloactively efficient. Adding more realism by imposing credit limits creates nonlinearities that can cause prices to oscillate even in the absence of external information.

Keywords: market making; price formation; technical trading; optimal control; credit limits; institutional constraints; dynamical systems; market efficiency (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2001-04-01
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:sce:scecf1:111

Access Statistics for this paper

More papers in Computing in Economics and Finance 2001 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().