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The price discovery process (also called price discovery mechanism) is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers.[1]
Price discovery is different from valuation. Price discovery process involves buyers and sellers arriving at a transaction price for a specific item at a given time. It involves the following: [2]
- Buyers and seller (number, size, location, and valuation perceptions)
- Market mechanism (bidding and settlement process, liquidity)
- Available information (amount, timeliness, significance and reliability) including
- futures and other related markets
- Risk management choices.
In a dynamic market, the price discovery takes place continuously. The price will sometimes fall below the duration average and sometimes exceed the average as a result of the noise due to uncertainties.
Usually, price discovery helps find the exact price for a commodity or a share of a company. The price discovery is used in speculative markets which affects traders, manufacturers, exporters, farmers, oil well owners, refineries, governments, consumers, and speculators.
See also[]
- Auction
- Efficient market hypothesis
- Initial Public Offering
- Market-based valuation
- Pricing
- Real estate appraisal
- Stock valuation
- Arbitrage pricing theory (APT)
- Single-index model
References[]
- ↑ Equity Markets in Action: The Fundamentals of Liquidity, Market Structure & Trading, Robert A. Schwartz, Reto Francioni, John Wiley and Sons, 2004
- ↑ http://agecon.okstate.edu/pricing/ Pricing and Price discovery Issues
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