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Pricing, liquidity and the control of dynamic systems in finance and economics

Willis, Geoff (2011): Pricing, liquidity and the control of dynamic systems in finance and economics.

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Abstract

The paper discusses various practical consequences of treating economics and finance as an inherently dynamic and chaotic system. On the theoretical side this looks at the general applicability of the market-making pricing approach to economics in general. The paper also discuses the consequences of the endogenous creation of liquidity and the role of liquidity as a state variable. On the practical side, proposals are made for reducing chaotic behaviour in both housing markets and stock markets.

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