{"title":"Aggregation of financial markets","authors":"Georg Menz, Moritz Voß","doi":"arxiv-2309.04116","DOIUrl":null,"url":null,"abstract":"We present a formal framework for the aggregation of financial markets\nmediated by arbitrage. Our main tool is to characterize markets via utility\nfunctions and to employ a one-to-one correspondence to limit order book states.\nInspired by the theory of thermodynamics we argue that the arbitrage-mediated\naggregation mechanism gives rise to a market-dynamical entropy, which\nquantifies the loss of liquidity caused by aggregation. We also discuss future\ndirections of research in this emerging theory of market dynamics.","PeriodicalId":501372,"journal":{"name":"arXiv - QuantFin - General Finance","volume":"52 1","pages":""},"PeriodicalIF":0.0000,"publicationDate":"2023-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"arXiv - QuantFin - General Finance","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/arxiv-2309.04116","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 0
Abstract
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. We also discuss future
directions of research in this emerging theory of market dynamics.
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