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On the Interpretation of Price Adjustments and Demand in Asset Pricing Models with Mean-Variance Optimization

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Author Info
Franke, Reiner
Abstract

With reference to the class of asset pricing models with a market maker and mean-variance optimization of speculative agents, the note seeks to clarify the concepts behind the price adjustment rule, which are often treated somewhat carelessly in this literature. Calling attention to the distinction between the agents? desired holding of the risky asset and the desired change in their position, the following conclusion is drawn. If market prices are said to adjust in the direction of excess demand, then the story of the maximization of expected wealth should be dropped. On the other hand, the story could be perfectly maintained if the market maker were assumed to adjust prices inversely to his accumulated inventory. --

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Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2008,13.

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Date of creation: 2008
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Handle: RePEc:zbw:cauewp:7366

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Web page: http://www.wiso.uni-kiel.de/econ/

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Related research
Keywords: Expected wealth maximization; market maker; positions of speculative agents;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. He, Xue-Zhong & Li, Youwei, 2007. "Power-law behaviour, heterogeneity, and trend chasing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3396-3426, October. [Downloadable!] (restricted)
  2. Reiner Franke & Toichiro Asada, 2008. "Incorporating positions into asset pricing models with order-based strategies," Journal of Economic Interaction and Coordination, Springer, vol. 3(2), pages 201-227, December. [Downloadable!] (restricted)
  3. Bottazzi, Giulio & Dosi, Giovanni & Rebesco, Igor, 2005. "Institutional architectures and behavioral ecologies in the dynamics of financial markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 197-228, February. [Downloadable!] (restricted)
  4. Reiner Franke, 2007. "A Prototype Model of Speculative Dynamics With Position-Based Trading," Working Papers wp07-08, Warwick Business School, Financial Econometrics Research Centre. [Downloadable!]
  5. Farmer, J. Doyne & Joshi, Shareen, 2002. "The price dynamics of common trading strategies," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 149-171, October. [Downloadable!] (restricted)
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