A simple model of local prices and associated risk evaluation

TL;DR

This paper introduces a simple spin system model to simulate asset price dynamics, revealing how system dimension influences price distribution and risk, with implications for rare assets or markets with few participants.

Contribution

The study presents a novel spin system model that links system dimension to asset price distribution and risk, providing insights into rare asset markets.

Findings

Low-dimensional systems exhibit bimodal price distributions and high risk.

High-dimensional systems show Gaussian price distributions and lower risk.

Results are relevant for markets with few participants or rare assets.

Abstract

A simple spin system is constructed to simulate dynamics of asset prices and studied numerically. The outcome for the distribution of prices is shown to depend both on the dimension of the system and the introduction of price into the link measure. For dimensions below 2, the associated risk is high and the price distribution is bimodal. For higher dimensions, the price distribution is Gaussian and the associated risk is much lower. It is suggested that the results are relevant to rare assets or situations where few players are involved in the deal making process.