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A Markov model for valuing asset prices in a dynamic bargaining market

Author

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  • Masaaki Kijima
  • Yoshihiko Uchida

Abstract

This paper proposes a Markov chain model for studying the impact on asset prices of illiquidity associated with search and bargaining in an economy. The economy consists of finitely many agents who can trade only when they find each other, and any trade between agents changes the population of the agent types which affects the asset price in the future. Assuming that the equilibrium utility as well as the trade price is proportional to the asset dividend, we obtain the asset prices in steady state. Through extensive numerical experiments, we observe that the equilibrium prices exhibit the cutoff phenomenon (i.e. crash) as the fraction of pessimistic agents becomes large. Models with a market maker as well as irrational agents are also considered.

Suggested Citation

  • Masaaki Kijima & Yoshihiko Uchida, 2005. "A Markov model for valuing asset prices in a dynamic bargaining market," Quantitative Finance, Taylor & Francis Journals, vol. 5(3), pages 277-288.
    • Handle: RePEc:taf:quantf:v:5:y:2005:i:3:p:277-288
    DOI: 10.1080/14697680500149016
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
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    Cited by:

    1. Yoshihiko Uchida & Daisuke Yoshikawa, 2014. "A Pricing Theory under a Finite Number of Securities Issued: A Synthesis of "Market Microstructure" and "Mathematical Finance"," IMES Discussion Paper Series 14-E-04, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Mark Bowden & Stuart McDonald, 2008. "The Impact of Interaction and Social Learning on Aggregate Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 31(3), pages 289-306, April.
    3. Tetsuya Adachi & Yoshihiko Uchida, 2015. "Variation of Wrong-Way Risk Management and Its Impact on Security Price Changes," IMES Discussion Paper Series 15-E-11, Institute for Monetary and Economic Studies, Bank of Japan.

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