Discovering Market Prices: Which Price Formation Model Best Predicts the Next Trade?

BRL Working Paper Series2/2019

12 Pages Posted: 8 Jul 2019

See all articles by André Meyer

André Meyer

Blockchain Research Lab

Ingo Fiedler

University of Hamburg - Institute of Commercial Law

Date Written: June 17, 2019

Abstract

For most purposes of technical analysis, valuation metrics and many other relevant financial methods, the price of the last transaction is considered representative of the market price. The straightforward argument is that at this price, supply and demand have last met. However, on closer examination, the question arises as to why a past event should be relevant to the future, and why other, potentially more recent information should not be used to discover a future price. Building on this question, we apply a range of new price formation models to current data available on crypto currency exchanges that depict level II market data, and compare their short-term forecast accuracy against the common-used ticker price and mid-price. Data on crypto currencies is used as the closest example to free markets, since crypto currency trading is continuous, markets never close, and interferences through oversight is extremely rare. We find that two of the five price formation models investigated outperform the widely used ticker as a price indicator for the next trade. We conclude that the volume-limited clearing price best predicts the price of subsequent trades. Its usage can thus enhance the explanatory power of various financial analyses.

Keywords: Price Discovery, High-Frequency Trading, Short-Term Price Prediction, Limit Order Book, Mid-Price, Micro-Price, Clearing Price

JEL Classification: G10

Suggested Citation

Meyer, André and Fiedler, Ingo, Discovering Market Prices: Which Price Formation Model Best Predicts the Next Trade? (June 17, 2019). BRL Working Paper Series2/2019, Available at SSRN: https://ssrn.com/abstract=3414972 or http://dx.doi.org/10.2139/ssrn.3414972

André Meyer (Contact Author)

Blockchain Research Lab ( email )

Colonnaden 72
Hamburg, 22303
Germany

HOME PAGE: http://www.blockchainresearchlab.org/en/home/

Ingo Fiedler

University of Hamburg - Institute of Commercial Law ( email )

Max-Brauer-Allee 60
Hamburg, 22765
Germany
+4940428386539 (Phone)
+4940428386443 (Fax)

HOME PAGE: http://www.wiso.uni-hamburg.de/institute/irdw

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
108
Abstract Views
548
rank
309,158
PlumX Metrics