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Market Participation and Share Prices
Author(s) -
Orosel Gerhard O.
Publication year - 1997
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/1467-9965.00037
Subject(s) - economics , volatility (finance) , econometrics , stock market , market share , stock market crash , crash , financial economics , stock (firearms) , monetary economics , finance , mechanical engineering , paleontology , horse , computer science , engineering , biology , programming language
Share prices are analyzed in an overlapping generations model in which the generational size is random. This models stochastic fluctuations of market participants and can explain noninformational volatility of share prices. There exists a (stochastic) stationary equilibrium, which may be nonunique. In equilibrium, (a) the share price increases and (b) expected utility decreases with the generational size. A decline of this size below a critical level induces a crash: the stock price falls substantially, shares are undervalued, and investors’ demand is restricted by illiquidity. Further, the model predicts the empirically observed positive correlation between volume of trade and absolute price changes.