Recently, much efforts were given to apply physics methods to problems in economics. This effort yielded interesting empirical analysis and conceptual models. However, with the exception of refinements to option pricing theory, thus far it made little success in producing theories that make falsifiable predictions about the most important properties of markets. This paper develops a mechanistic random process model of the continuous double auction, which was the standard method for trade matching in modern financial markets.
Quantitative model of price diffusion and market friction based on trading as a mechanistic random process
Iori G.;
2003-01-01
Abstract
Recently, much efforts were given to apply physics methods to problems in economics. This effort yielded interesting empirical analysis and conceptual models. However, with the exception of refinements to option pricing theory, thus far it made little success in producing theories that make falsifiable predictions about the most important properties of markets. This paper develops a mechanistic random process model of the continuous double auction, which was the standard method for trade matching in modern financial markets.
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