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

TL;DR

This paper explores the dynamic and chaotic nature of financial markets, examining how market-making pricing, liquidity, and chaos control can influence economic stability and market behavior.

Contribution

It introduces a theoretical framework for applying market-making pricing to economics and proposes practical methods to reduce chaos in housing and stock markets.

Findings

Liquidity acts as a key state variable in market dynamics.

Market-making pricing can be generalized to broader economic systems.

Proposals for chaos reduction improve market stability.

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.