Aggregation of financial markets
Fuente:
arXiv
Saved in:
| Main Authors: | , |
|---|---|
| Format: | Preprint |
| Published: |
2023
|
| Subjects: | |
| Online Access: | |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| _version_ | 1866917770976821248 |
|---|---|
| author | Menz, Georg Voß, Moritz |
| author_facet | Menz, Georg Voß, Moritz |
| contents | We present a formal framework for the aggregation of financial markets mediated by arbitrage. Our main tool is to characterize markets via utility functions and to employ a one-to-one correspondence to limit order book states. Inspired by the theory of thermodynamics, we argue that the arbitrage-mediated aggregation mechanism gives rise to a market-dynamical entropy, which quantifies the loss of liquidity caused by aggregation. As a concrete guiding example, we illustrate our general approach with the Uniswap v2 automated market maker protocol used in decentralized cryptocurrency exchanges, which we characterize as a so-called ideal market. We derive its equivalent limit order book representation and explicitly compute the arbitrage-mediated aggregation of two liquidity pools of the same asset pair with different marginal prices. We also discuss future directions of research in this emerging theory of market dynamics. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2309_04116 |
| institution | arXiv |
| publishDate | 2023 |
| record_format | arxiv |
| spellingShingle | Aggregation of financial markets Menz, Georg Voß, Moritz Mathematical Finance General Finance 91G15, 91B50 We present a formal framework for the aggregation of financial markets mediated by arbitrage. Our main tool is to characterize markets via utility functions and to employ a one-to-one correspondence to limit order book states. Inspired by the theory of thermodynamics, we argue that the arbitrage-mediated aggregation mechanism gives rise to a market-dynamical entropy, which quantifies the loss of liquidity caused by aggregation. As a concrete guiding example, we illustrate our general approach with the Uniswap v2 automated market maker protocol used in decentralized cryptocurrency exchanges, which we characterize as a so-called ideal market. We derive its equivalent limit order book representation and explicitly compute the arbitrage-mediated aggregation of two liquidity pools of the same asset pair with different marginal prices. We also discuss future directions of research in this emerging theory of market dynamics. |
| title | Aggregation of financial markets |
| topic | Mathematical Finance General Finance 91G15, 91B50 |
| url | https://arxiv.org/abs/2309.04116 |