Have you ever wondered how the volume of trades affects the prices of assets? Let's dive into the fascinating world of market-based asset pricing. Imagine you're looking at the volume weighted average price (VWAP), which is like the first market-based statistical moment. This helps us understand how the volume of trades influences the price. Now, if all the trading volumes stay the same during a specific time frame, then the market-based statistical moments will be the same as the frequency-based ones.
In simple terms, we can use a few statistical moments to estimate the probability of prices in the market. What's interesting is that using VWAP leads to no direct correlation between prices and volumes. Instead, we find correlations between prices and the squares of trading volumes, and also between the squares of prices and volumes.
To forecast how prices will behave in the market, we need to predict just two statistical moments and consider the correlation of their trade values and volumes. This limits the accuracy of our predictions to the first two moments and the precision of how well we can approximate these with a Gaussian distribution.
Improving large-scale economic and market models, like those used by major institutions, requires using these market-based statistical moments. These can provide more accurate and reliable forecasts.
