Premium
Trend‐based asset flow in technical analysis and securities marketing
Author(s) -
Caginalp G.,
Balenovich D.
Publication year - 1996
Publication title -
psychology and marketing
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.035
H-Index - 116
eISSN - 1520-6793
pISSN - 0742-6046
DOI - 10.1002/(sici)1520-6793(199607)13:4<405::aid-mar5>3.0.co;2-e
Subject(s) - economics , asset (computer security) , financial economics , equity (law) , microeconomics , computer science , computer security , political science , law
This article generalizes the asset flow model of the dynamics of equity prices to multiple groups of investors with distinct strategies and assessments of value. Applications include the closed‐end fund puzzle, government privatizations, and marketing of initial and secondary offerings of equities. The generalized model is used to provide a theoretical foundation for the practice of technical analysis, in which price history and patterns are examined in order to obtain an indication of future prices. The asset flow model, which is an extension of price adjustment due to disequilibria, tracks the finite assets of each group and involves a preference function that is governed by the price trend in addition to the fundamental value of the equity. The system, which consists of a system of ordinary differential equations, uses four parameters that characterize the extent to which investors' preferences are governed by trend versus fundamental value, and the time scales associated with each motivation. The evolution toward equilibrium is found to be much more complex than the monotonic change that is implied by standard price theories. Finally, the time scale for the return to equilibrium, a concept crucial to securities marketing, is considered in a precise quantitative context. The asset flow approach provides a unified explanation for many of the basic patterns of technical analysis and market phenomena. In particular, the origin of a typical bubble can be explained on the basis of trend‐based investors entering a market hitherto dominated by value‐based investors. Thus, a channel of increasing prices yields to a breakout from a trend line. The formation of triangle patterns in prices has its origin in the emergence of a second group of investors, with a different assessment of value, that offers fresh supply or demand near a particular price. The article also considers applications to the marketing of securities, consumer preferences which are logically influenced by the popular trend (e.g., VHS versus Beta or long‐distance telephone companies) and (particularly three‐way) elections. © 1996 John Wiley & Sons, Inc.