The CMMV Pricing Model in Practice (1910.10005v1)

Abstract: Mainstream financial econometrics methods are based on models well tuned to replicate price dynamics, but with little to no economic justification. In particular, the randomness in these models is assumed to result from a combination of exogenous factors. In this paper, we present a model originating from game theory, whose corresponding price dynamics are a direct consequence of the information asymmetry between private and institutional investors. This model, namely the CMMV pricing model, is therefore rooted in market microstructure. The pricing methods derived from it also appear to fit very well historical price data. Indeed, as evidenced in the last section of the paper, the CMMV model does a very good job predicting option prices from readily available data. It also enables to recover the dynamic of the volatility surface.