A Microeconomic Approach to Diffusion Models For Stock Prices |
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Authors: | Hans Föllmer Martin Schweizer |
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Institution: | Institut für Angewandte Mathematik, Universität Bonn, D-W-5300 Bonn 1, Germany;Institut für Mathematische Stochastik, Universität Göttingen, D-W-3400 Göttingen, Germany |
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Abstract: | This paper studies a class of diffusion models for stock prices derived by a microeconomic approach. We consider discrete-time processes resulting from a market equilibrium and then apply an invariance principle to obtain a continuous-time model. the resulting process is an Ornstein-Uhlenbeck process in a random environment, and we analyze its qualitative behavior. In particular, we provide simple criteria for the stability or instability of the corresponding stock price model, and we give explicit formulae for the invariant distributions in the recurrent case. |
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Keywords: | stock price models invariance principle Ornstein-Uhlenbeck prcess random environment invariant distribution noise traders information traders |
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