Liquidity Effect on the Asset Price Forecasting

The effect of the high/low liquidity in the market on the asset price forecasting is studied by deriving a system of ordinary differential equations. The model is an extension of that introduced by Caginalp and Merdan for the system involving a single asset traded by heterogenous groups. Derivation is based on the finiteness of assets (rather than assuming unbounded arbitrage) in addition to investment strategies that are based on not only price momentum (trend) or valuation considerations but also the liquidity value. The time evolution of the asset price yielded by bothmodels is compared for an example by numerical simulations