Department of Economics. University of Melbourne. Parkville Victoria
3052 Australia
ABSTRACT
This paper explores a pricing algorithm which behaves as a Walrasian auctioneer under the following constraints: [i] traders arrive randomly and each sales/purchase order should be carried out at the currently posted price (sequential service), [ii] the auctioneer need not know the exact fundamental value of the traded asset (s), and [iii] price movements depend only upon trade orders, not upon which traders submit these orders (anonymous traders). The suggested auctioneering algorithm is such that the arrivals of sales and purchase orders affect the second-order increment (acceleration), not directly the first-order increment (velocity), of the price.
The resulting price path contains both a component due to the fundamental of the asset, and a component due to random arrivals of trade orders. It is thereby shown that the market price can stochastically fluctuate even if the fundamental is non-stochastic. On the other hand, if the fundamental is in fact stochastic, then information about the fundamental will not be fully revealed by the price realisation even in the long run, because uninformed traders above no means to distinguish between fundamental and random arrival components in the observed price fluctuation.
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