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Modeling the birth of a liquid market

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  • Schmidt, Anatoly B.

Abstract

A continuum market dynamics model with a variable number of traders is proposed. It includes an “impatience” factor that characterizes the frequency of leaving the market by those traders who are not been able to find their counterparts. The market liquidity is defined simply as the presence of traders on both the bid and offer sides of the market. If the price variation is neglected, the deterministic model can be transformed into the Schrodinger equation with a Morse-type potential. It is concluded that the discrete model may be more appropriate for describing a transition to a liquid market. Results of stochastic modeling the birth of a liquid market are discussed.

Suggested Citation

  • Schmidt, Anatoly B., 2000. "Modeling the birth of a liquid market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 283(3), pages 479-485.
    • Handle: RePEc:eee:phsmap:v:283:y:2000:i:3:p:479-485
    DOI: 10.1016/S0378-4371(00)00201-6
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    References listed on IDEAS

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    1. Robert F. Engle & Joe Lange, 1997. "Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market," NBER Working Papers 6129, National Bureau of Economic Research, Inc.
    2. Jun Muranaga & Tokiko Shimizu, 1999. "Market Microstructure and Market Liquidity," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-28, Bank for International Settlements.
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    Keywords

    Market dynamics; Market liquidity;

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