# Unifying Market Microstructure and Dynamic Asset Pricing

**Authors:** Davide Lauria, Yuan Hu, W. Brent Lindquist, Svetlozar T. Rachev  
**arXiv:** [2304.02356](https://arxiv.org/abs/2304.02356)  
**Date:** 2023-04-05  
**Summary page:** https://www.summarizepaper.com/en/paper/2304.02356v1/

## Key points

- Authors propose a discrete binary tree for pricing contingent claims with underlying securities characterized by discontinuity jumps
- Discrete nature of financial markets means continuous models cannot accurately describe traders' expectations of future price variations
- Binary tree model contains classical models of market microstructure theory as special cases
- Proposed binary tree model allows for accurate pricing of contingent claims in financial markets with discontinuous price movements
- Underlying price process converges to classical geometric Brownian motion as time interval between trades approaches zero, making it versatile for pricing various types of assets
- Innovative approach to pricing contingent claims in financial markets with discontinuous price movements

## Summary

In their paper titled "Unifying Market Microstructure and Dynamic Asset Pricing," authors Davide Lauria, Yuan Hu, W. Brent Lindquist, and Svetlozar T. Rachev introduce a discrete binary tree for pricing contingent claims with underlying securities that are characterized by discontinuity jumps. The authors argue that the discrete nature of financial markets means that a continuous model is unable to correctly describe traders' expectations of future price variations. To address this issue, they propose a binary tree model which contains classical models of market microstructure theory as special cases. This proposed binary tree model allows for the accurate pricing of contingent claims in financial markets with discontinuous price movements. Furthermore, the underlying price process converges to the classical geometric Brownian motion as the time interval between trades approaches zero, making it a versatile tool for pricing various types of assets. Overall, this paper offers an innovative approach to pricing contingent claims in financial markets with discontinuous price movements. By introducing a discrete binary tree model, the authors provide traders and investors with a more accurate way to predict future price variations and make informed investment decisions.