Two Price Economic Equilibria and Financial Market Bid/Ask prices

23 Pages Posted: 15 Jul 2020

See all articles by Dilip B. Madan

Dilip B. Madan

University of Maryland - Robert H. Smith School of Business

Robert J. Elliott

University of Calgary - Haskayne School of Business; University of Alberta - Department of Mathematical and Statistical Sciences; University of South Australia

Ken Siu

Macquarie University; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Date Written: June 18, 2020

Abstract

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

Madan, Dilip B. and Elliott, Robert James and Siu, Ken, Two Price Economic Equilibria and Financial Market Bid/Ask prices (June 18, 2020). Available at SSRN: https://ssrn.com/abstract=3633351 or http://dx.doi.org/10.2139/ssrn.3633351

Dilip B. Madan (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)

Robert James Elliott

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

University of Alberta - Department of Mathematical and Statistical Sciences ( email )

Edmonton, Alberta T6G 2G1
Canada
403-492-5811 (Phone)
403-492-6826 (Fax)

University of South Australia ( email )

37-44 North Terrace
Adelaide
Australia

Ken Siu

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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