Two Price Economic Equilibria and Financial Market Bid/Ask prices
23 Pages Posted: 15 Jul 2020
Date Written: June 18, 2020
Demand and supply uncertainty lead to market models setting prices to levels of acceptable risk for excess supplies and net revenues. The result is a two price equilibrium. Equilibrium solutions applied to financial market data infer demand and supply elasticities and log normal volatilities. Demand elasticities are observed to be higher than supply elasticities as are the volatilities. Normalizing observed volatilities to the volatility of the daily traded volume allows for the inference of a market implied duration of the equilibrium. The median duration is around a minute and half with an interquartile range from 37 seconds to three minutes.
Keywords: Acceptable Risks, Distorted Expectations, Minmaxvar Distortion, Convex Risk Measures
JEL Classification: G10, D53, D58
Suggested Citation: Suggested Citation