On the Interpretation of Price Adjustments and Demand in Asset Pricing Models with Mean-Variance Optimization
AbstractWith 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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Bibliographic InfoPaper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2008,13.
Date of creation: 2008
Date of revision:
Expected wealth maximization; market maker; positions of speculative agents;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-20 (All new papers)
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.:
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