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Markets with random lifetimes and private values: mean reversion and option to trade

Cvitanić, Jakša and Plott, Charles and Tseng, Chien-Yao (2015) Markets with random lifetimes and private values: mean reversion and option to trade. Decisions in Economics and Finance, 38 (1). pp. 1-19. ISSN 1593-8883. https://resolver.caltech.edu/CaltechAUTHORS:20140128-101150546

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Abstract

We consider a market in which traders arrive at random times, with random private values for the single-traded asset. A trader's optimal trading decision is formulated in terms of exercising the option to trade one unit of the asset at the optimal stopping time. We solve the optimal stopping problem under the assumption that the market price follows a mean-reverting diffusion process. the model is calibrated to experimental data taken from Alton and Plott (Principles of continuous price determination in the experimental environment with flows of random arrivals and departures. Working paper, Caltech, 2010), resulting in a very good fit. In particular, the estimated long-term mean of the traded prices is close to the theoretical long-term mean at which the expected number of buys is equal to the expected number of sells. We call that value long-term competitive equilibrium, extending the concept of flow competitive equilibrium of Alton and Plott (Principles of continuous price determination in an experimental environment with flows of random arrivals and departures. Working paper, Caltech, 2010).


Item Type:Article
Related URLs:
URLURL TypeDescription
https://dx.doi.org/10.1007/s10203-014-0155-4DOIArticle
https://link.springer.com/article/10.1007%2Fs10203-014-0155-4PublisherArticle
http://rdcu.be/ttdyPublisherFree ReadCube access
ORCID:
AuthorORCID
Cvitanić, Jakša0000-0001-6651-3552
Additional Information:© 2014 Springer-Verlag Italia. Received: 21 January 2013; Accepted: 6 January 2014; First Online: 18 January 2014. The research of J. Cvitanić is supported in part by NSF Grant DMS 10-08219.
Funders:
Funding AgencyGrant Number
NSFDMS-10-08219
Subject Keywords:trading with private values, equilibrium price, optimal exercise of options, experimental markets, tick-by-tick trading
Issue or Number:1
Classification Code:JEL: G11, G12
Record Number:CaltechAUTHORS:20140128-101150546
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20140128-101150546
Official Citation:Cvitanić, J., Plott, C. & Tseng, CY. Decisions Econ Finan (2015) 38: 1. doi:10.1007/s10203-014-0155-4
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:43529
Collection:CaltechAUTHORS
Deposited By: Susan Vite
Deposited On:29 Jan 2014 17:06
Last Modified:03 Oct 2019 06:08

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