How markets slowly digest changes in supply and demand Export

@article{citeulike:5793353, abstract = {In this article we revisit the classic problem of tatonnement in price formation from a microstructure point of view, reviewing a recent body of theoretical and empirical work ex- plaining how uctuations in supply and demand are slowly incorporated into prices. Because revealed market liquidity is extremely low, large orders to buy or sell can only be traded incrementally, over periods of time as long as months. As a result order ow is a highly persistent long-memory process. Maintaining compatibility with market eciency has pro- found consequences on price formation, on the dynamics of liquidity, and on the nature of impact. We review a body of theory that makes detailed quantitative predictions about the volume and time dependence of market impact, the bid-ask spread, order book dynamics, and volatility. Comparisons to data yield some encouraging successes. This framework suggests a novel interpretation of nancial information, in which agents are at best only weakly informed and all have a similar and extremely noisy impact on prices. Most of the processed information appears to come from supply and demand itself, rather than from external news. The ideas reviewed here are relevant to market microstructure regulation, agent-based models, cost-optimal execution strategies, and understanding market ecologies.}, author = {Bouchaud, Jean-Philippe and Farmer, J. Doyne and Lillo, Fabrizio}, citeulike-article-id = {5793353}, posted-at = {2009-09-16 21:47:34}, priority = {2}, title = {How markets slowly digest changes in supply and demand} }

TY - JOUR ID - citeulike:5793353 L3 - citeulike-article-id:5793353 N2 - In this article we revisit the classic problem of tatonnement in price formation from a microstructure point of view, reviewing a recent body of theoretical and empirical work ex- plaining how uctuations in supply and demand are slowly incorporated into prices. Because revealed market liquidity is extremely low, large orders to buy or sell can only be traded incrementally, over periods of time as long as months. As a result order ow is a highly persistent long-memory process. Maintaining compatibility with market eciency has pro- found consequences on price formation, on the dynamics of liquidity, and on the nature of impact. We review a body of theory that makes detailed quantitative predictions about the volume and time dependence of market impact, the bid-ask spread, order book dynamics, and volatility. Comparisons to data yield some encouraging successes. This framework suggests a novel interpretation of nancial information, in which agents are at best only weakly informed and all have a similar and extremely noisy impact on prices. Most of the processed information appears to come from supply and demand itself, rather than from external news. The ideas reviewed here are relevant to market microstructure regulation, agent-based models, cost-optimal execution strategies, and understanding market ecologies. TI - How markets slowly digest changes in supply and demand AU - Bouchaud, Jean-Philippe AU - Farmer, Doyne AU - Lillo, Fabrizio ER -