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Market-Based Asset Price Probability

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  • Victor Olkhov

Abstract

We consider the randomness of market trade values and volumes as the origin of asset price stochasticity. We define the first four market-based price statistical moments that depend on statistical moments and correlations of market trade values and volumes. Market-based price statistical moments coincide with conventional frequency-based ones if all trade volumes are constant during the time averaging interval. We present approximations of market-based price probability by a finite number of price statistical moments. We consider the consequences of the use of market-based price statistical moments for asset-pricing models and Value-at-Risk. We show that the use of volume weighted average price results in zero price-volume correlations. We derive market-based correlations between price and squares of volume and between squares of price and volume. To forecast market-based price volatility at horizon T one should predict the first two statistical moments of market trade values and volumes and their correlations at the same horizon T.

Suggested Citation

  • Victor Olkhov, 2022. "Market-Based Asset Price Probability," Papers 2205.07256, arXiv.org, revised Feb 2024.
    • Handle: RePEc:arx:papers:2205.07256
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    Cited by:

    1. Victor Olkhov, 2023. "Economic Complexity Limits Accuracy of Price Probability Predictions by Gaussian Distributions," Papers 2309.02447, arXiv.org, revised Apr 2024.
    2. Olkhov, Victor, 2022. "Market-Based Price Autocorrelation," MPRA Paper 120288, University Library of Munich, Germany, revised 26 Feb 2024.
    3. Olkhov, Victor, 2023. "Economic Theory as Successive Approximations of Statistical Moments," MPRA Paper 118722, University Library of Munich, Germany.
    4. Victor Olkhov, 2022. "Why Economic Theories and Policies Fail? Unnoticed Variables and Overlooked Economics," Papers 2208.07839, arXiv.org.

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    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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