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Financial Variables, Market Transactions, and Expectations as Functions of Risk

Author

Listed:
  • Victor Olkhov

    (TVEL, Moscow 115409, Russia)

Abstract
This paper develops methods and a framework of financial market theory. We model financial markets as a system of agents which perform market transactions with other agents under the action of numerous expectations. Agents’ expectations are formed of economic and financial variables, market transactions, the expectations of other agents, and other factors that impact financial markets. We use the risk ratings of agents as their coordinates and approximate a description of financial variables, market transactions, and expectations of numerous separate agents by density functions of aggregated agents in the economic domain. The motion of separate agents in the economic domain due to a change of agents’ risk rating produces collective financial flows of variables, transactions, and expectations. We derive equations on collective financial variables, market transactions, expectations, and their flows in the economic domain. These flows define the evolution of financial markets. As an example, we present a simple model with linear dependence between disturbances of volume and the cost of transactions on one hand, and disturbances of expectations that determine transactions on the other hand. Our model describes harmonique oscillations of these disturbances with numerous frequencies and allows an explicit form for fluctuations of price and return to be derived. These relations show a direct dependence between price, return, and volume perturbations.

Suggested Citation

  • Victor Olkhov, 2019. "Financial Variables, Market Transactions, and Expectations as Functions of Risk," IJFS, MDPI, vol. 7(4), pages 1-27, November.
    • Handle: RePEc:gam:jijfss:v:7:y:2019:i:4:p:66-:d:283491
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Olkhov, Victor, 2022. "Introduction of the Market-Based Price Autocorrelation," MPRA Paper 112003, University Library of Munich, Germany.
    2. Olkhov, Victor, 2020. "Volatility Depend on Market Trades and Macro Theory," MPRA Paper 102434, University Library of Munich, Germany.
    3. Victor Olkhov, 2023. "Economic Complexity Limits Accuracy of Price Probability Predictions by Gaussian Distributions," Papers 2309.02447, arXiv.org, revised Apr 2024.
    4. Olkhov, Victor, 2022. "Economic Policy - the Forth Dimension of the Economic Theory," MPRA Paper 112685, University Library of Munich, Germany.
    5. Olkhov, Victor, 2020. "Price, Volatility and the Second-Order Economic Theory," MPRA Paper 102767, University Library of Munich, Germany.
    6. Olkhov, Victor, 2020. "Classical Option Pricing and Some Steps Further," MPRA Paper 105431, University Library of Munich, Germany, revised 28 Dec 2020.
    7. Victor Olkhov, 2020. "Business Cycles as Collective Risk Fluctuations," Papers 2012.04506, arXiv.org.
    8. Olkhov, Victor, 2022. "Why Economic Theories and Policies Fail? Unnoticed Variables and Overlooked Economics," MPRA Paper 114187, University Library of Munich, Germany.

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