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Stock Price Volatility in a Multiple Security Overlapping Generations Model

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Author Info
Matthew Spiegel (University of California at Berkeley)
Abstract

A number of empirical studies have reached the conclusion that stock price volatility cannot be fully explained within the standard dividend discount model. This paper proposes a resolution based upon a model that contains both a random supply of risky assets and finitely lived agents who trade in a multiple security environment. As the analysis shows there exist 2K equilibria when K securities trade. The low volatility equilibria have properties analogous to those found in the infinitely lived agent models of Campbell and Kyle (1991) and Wang (1993, 1994). In contrast, the high volatility equilibria have very different characteristics. Within the high volatility equilibria very large price variances can be generated with very small supply shocks. Using previously established empirical results the model can reconcile the data with supply shocks that are less than 10% as large as observed return shocks. The multiple security analysis also shows that within the economy some securities may trade under high volatility conditions, while others trade in low volatility conditions. Switching the economy from a high to a low volatility equilibrium for any single security may be very difficult. Depending upon the variance-covariance structure of the economy, an equilibrium change may require simultaneous control over the trading environment of every single security in the economy.

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Publisher Info
Paper provided by EconWPA in its series Finance with number 9608002.

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Length: 47 pages
Date of creation: 29 Aug 1996
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Handle: RePEc:wpa:wuwpfi:9608002

Note: Type of Document - WordPerfect 6.1; prepared on IBM-PC ; to print on HP LaserJet 4P; pages: 47; figures: included
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Web page: http://129.3.20.41

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Related research
Keywords: stock price volatility overlapping generations model.

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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    Other versions:
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