Equilibrium Asset Price Dynamics with Holding-Term Switching

  • David W. K. Yeung
Part of the Advances in Computational Management Science book series (AICM, volume 4)

Abstract

Recent research has uncovered empirical patterns in financial markets which are difficult to explain in terms of conventional asset pricing models. A variety of methods have been published, under which financial asset returns can be predicted on the basis of publicly available information. This paper presents a framework for the rational pricing of financial assets and derives a tractable price dynamics which incorporates relevant observable market information. In particular, the standard dynamics is generalised by linking asset price to earnings. An asset market populated by two groups of individuals — short holding-term (short-horizon) traders and long holding-term (long-horizon) traders — is modelled. The groups vary in size as market conditions change, and it is shown that rational trading produces an equilibrium price dynamics which is tied to earnings and the rate of interest. The equilibrium is consistent in the sense that it is not possible to garner above-normal expected return through adroit speculation.

Keywords

Interest Rate Discount Rate Asset Price Financial Asset Dividend Yield 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media New York 2002

Authors and Affiliations

  • David W. K. Yeung

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