Digital Techniques Share Price Modeling based on a Time-varying Walrasian Equilibrium under Exchange Processes in the Financial Market

Abstract

This paper aims to develop an analytical theory of share pricing in a financial market environment. The proposed approach corresponds to an actual auction mechanism in which an electronic stock exchange terminal processes real-time data. The theoretical framework is based on the microeconomic model of an individual investor’s net demand. Equity resources and resources of “free” capital (exchanged for shares) owned by traders and the investors’ perception of the structure of the target portfolio are considered the initial variables of the model. The model differs from the classical theory of asset pricing in its notion of fundamental variables. The relations derived for the aggregated net demand in the stock market describe share pricing as a market exchange that results in the Walrasian equilibrium approximation. The authors offered an appropriate econometric technique for estimating the parameters of instantaneous aggregated net demand. The developed approach was tested using the Walrasian equilibrium concept, which demonstrated that the modeled share price corresponded with the observed share price for the Russian financial market. As an example, the authors presented the results of the investment strategy based on the developed approach for the Russian financial market during the 2008–2009 crash. The authors based their approach on identifying the expectations of the stock market participants through an analysis of high-frequency trading platform information. The microeconomic model describes the motives of traders for placing limit orders in the stock market and associates the price and volume of a particular limit order within the parameters of the capital capacity of the net demand of the trader. The application of the algorithm allows for the monitoring of the financial market situation and reveals the market expectations of traders based on the analysis of information transmitted by an order book of a trading platform.

Keywords

• capital asset pricing
• stock exchange
• stock prices
• trading algorithm
• walrasian equilibrium in the financial market