Journal article

Modelling price pressure in financial markets

Elena Asparouhova, Peter Bossaerts

Journal of Economic Behavior & Organization | ELSEVIER | Published : 2009

Abstract

We present experimental evidence that, unlike traditional assumptions in economic theory, security prices do not respond to pressure from their own excess demand. Instead, prices respond to excess demand of all securities, despite the absence of a direct link between markets. We propose a model of price pressure that explains these findings. In our model, agents set order prices that reflect the marginal valuation of desired future holdings, called "aspiration levels.". In the short run, as agents encounter difficulties executing their orders, they scale back their aspiration levels. Marginal valuations, order prices, and hence, transaction prices change correspondingly. The resulting price ..

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University of Melbourne Researchers