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Supply, Demand and the Market Process Essay


Introduction

Every business that enters the market is willing to be competitive and successful, as it is the only way to become profitable and meet the main economic goal common for all organizations. In order to do this, sellers should pay much attention to the peculiarities of demand and supply, emphasizing the way they influence the price of the product or service. Enormous attention is paid to their dynamics in the article prepared by Obizhaevaa and Wang (2013).

An assistant professor of finance and Chinese businessman and philanthropist tried to develop an efficient trading strategy that can reduce execution costs. They consider that both large and small trades can benefit if they can successfully operate without focusing on the static properties of supply and demand for security. The authors claim that it is more advantageous to think about dynamics and discuss how the speed of recovery affects trades.

They conclude that an efficient and effective trading strategy can be developed only with the help of a complex mix that includes trades of various sizes and can substantially save money. All in all, professionals create strategies for different trades that have diverse approaches to the perception of liquidity. It is claimed that the type of liquidity flow is not significant for small trades, but those businesses that operate with the large one should consider elimination, of the liquidity that is currently observed and reference to the new one. The authors published this work in the Journal of Financial Markets.

In this way, they got an opportunity to reach other professionals who deal with issues related to securities trading and pricing. This journal is focused on peer-reviewed research papers that are based on critical theoretical concepts, which proves that the articles published in it are authoritative and extremely valuable for business.

Review

The purpose of the article is to find out “what trading strategy is optimal in a market with limited supply/demand or liquidity” (Obizhaevaa & Wang, 2013). In this framework, the authors also pay much attention to the role of supply and demand, their influence on business operations, trading strategies, prices, and savings. As a result, professionals receive an opportunity to discuss the whole market function.

The authors considered that their main task was to investigate supply and demand dynamics and prove their significance for developing the optimal strategy. They were interested in the way the limited elasticity influenced trading behavior. Professionals claimed that the execution prices are often rather high. Trying to make it more efficient, businesses refer to the complex evaluation of static supply and demand properties, which is not vital for the organization and its success.

Obizhaevaa and Wang came to the idea that when developing the supply/demand schedule, initial dynamic changes should be discussed because they can dissipate over time. In this way, they mainly emphasize the value of resilience. Professionals state that it can help to develop the most appropriate execution strategy when defining trading times optimally.

This article is rather helpful for the business sphere, as it discusses the framework for supply and demand. The most benefit can be received by those who work in the limit order book market, as the researchers’ work was based on it. However, professionals ensure that even though this very market structure was chosen due to its convenience, the main conclusions remain applicable to other ones. They claim that supply and demand dynamics are rather general and the fact that this article does not include the evidence of success for other markets, can be expected. Obizhaevaa and Wang encourage businesses to adjust and improve their trading strategies according to the findings of their research that were developed after the successful combination of other researchers’ and own ideas.

In their work, Obizhaevaa and Wang emphasize that realistic views on the role of supply and demand in the marketplace are extremely important for market function. Professionals refer to the words of their predecessors to prove that such considerations are not only their subjunctive beliefs but ideas supported by many other researchers who had different focuses. Their perception of supply and demand correlates with the one Goettler, Parlour, and Rajan (2005) have.

These researchers consider them to have a dynamic nature that affects trading strategy. In this way, Obizhaevaa and Wang refute the claim of Huberman and Stanzl (2005) who discuss supply and demand in the same framework but claimed them to be static and less influential. All in all, all professionals agree that supply and demand have a price impact function regardless of their dissidence. The connection between supply, demand, and pricing is proved and generally accepted today (He & Mamaysky, 2005).

It is also revealed in the book written by Gwartney, Stroup, Sobel, and Macpherson (2014), in which the authors provide the most basic information about economics. Obizhaevaa and Wang apply their discussions on the order book market, emphasizing its dynamic behavior, which is extremely critical for the current research. Fortunately, it can be proved by Kempf, Mayston, and Yadav (2009) who also paid attention to this dynamic aspect.

The order book approach also turned out to be interesting to Weber and Rosenow (2005). Still, these professionals focused on buying and selling more. They took into consideration potential supply and demand discussing an efficient market that generates more benefits than cost. Liu and Park (2015) focused on the influences of supply and demand as well as the authors of the original article. Still, they were more interested in the price movement caused by demand alterations.

It reveals the change in quality and quantity that is critical for pricing in the framework of any industry and any type of market. Similar ideas are present in the chapter on supply and demand written by Gwartney at al. (2014). Thus, all these professionals claim that alterations in supply and demand require efficient buyers’ and sellers’ responses that can lead to the determination of the optimal price of a product or service.

In order to substantiate their opinion on the matter, Obizhaevaa and Wang not only analyzed previous works related to the subject but also developed formulas that allowed them to support their hypothesis. With the help of a conventional model, professionals tested their assumptions and made their research even more valuable. Thus, they introduced issues related to the topic providing controversial ideas and testing them then.

Conclusion

Obizhaevaa and Wang received an opportunity to create a unique article, as they combined the views of a successful businessman and outstanding researcher in the sphere. Having different approaches, they covered more related issues and made their work helpful for both professionals who operate in the market and those who investigate this framework from the theoretical point of view.

References

Goettler, R., Parlour, C., & Rajan, U. (2005). Equilibrium in a dynamic limit order market. Journal of Finance, 60(1), 2149-2192.

Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2014). Economics: Private and public choice. Mason, OH: Cengage Learning.

He, H., & Mamaysky, H., (2005). Dynamic trading policies with price impact. Journal of Economic Dynamics and Control, 29(1), 891–930.

Huberman, G., & Stanzl, W. (2005). Optimal liquidity trading. Review of Finance, 9(1), 165-200.

Kempf, A., Mayston, D., & Yadav, P. (2009). . Web.

Liu, J., & Park, S. (2015). Behind stock price movement. The Journal of Trading, 10(3), 1-12.

Obizhaevaa, A., & Wang, J. (2013). Optimal trading strategy and supply/demand dynamics. Journal of Financial Markets, 16(1), 1-32.

Weber, P, & Rosenow, B. (2005). Order book approach to price impact. Quantitative Finance, 5(4), 357-364.

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IvyPanda. (2020, September 15). Supply, Demand and the Market Process. Retrieved from https://ivypanda.com/essays/supply-demand-and-the-market-process/

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"Supply, Demand and the Market Process." IvyPanda, 15 Sept. 2020, ivypanda.com/essays/supply-demand-and-the-market-process/.

1. IvyPanda. "Supply, Demand and the Market Process." September 15, 2020. https://ivypanda.com/essays/supply-demand-and-the-market-process/.


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IvyPanda. "Supply, Demand and the Market Process." September 15, 2020. https://ivypanda.com/essays/supply-demand-and-the-market-process/.

References

IvyPanda. 2020. "Supply, Demand and the Market Process." September 15, 2020. https://ivypanda.com/essays/supply-demand-and-the-market-process/.

References

IvyPanda. (2020) 'Supply, Demand and the Market Process'. 15 September.

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