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"Price Barriers" and the Dynamics of Asset Prices in Equilibrium

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  • Pierluigi Balduzzi
  • Silverio Foresi
  • David Hait

Abstract

A price barrier is a price level at which a large number of investors either buy or sell securities. We analyze the dynamics of asset prices in an economy in which price barriers exist. Our analysis suggests that asset prices and volatility can exhibit jumps when the price barrier is reached. Interestingly, the market's anticipation of future trades can influence prices in the opposite direction from what one might expect. For example, when multiple barriers exist, stock prices can be inflated, rather than depressed, in the proximity of an anticipated stock sale.
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Suggested Citation

  • Pierluigi Balduzzi & Silverio Foresi & David Hait, 1996. ""Price Barriers" and the Dynamics of Asset Prices in Equilibrium," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-11, New York University, Leonard N. Stern School of Business-.
  • Handle: RePEc:fth:nystfi:96-11
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    Cited by:

    1. Pierdzioch, Christian, 2000. "Noise Traders? Trigger Rates, FX Options, and Smiles," Kiel Working Papers 970, Kiel Institute for the World Economy (IfW).
    2. repec:kap:revdev:v:20:y:2017:i:3:d:10.1007_s11147-017-9130-x is not listed on IDEAS
    3. Hervé Crès & Tobias Markeprand & Mich Tvede, 2016. "Incomplete financial markets and jumps in asset prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 201-219, June.
    4. Bauer, Christian & Herz, Bernhard, 2009. "Monetary and exchange rate stability in South and East Asia," Pacific-Basin Finance Journal, Elsevier, vol. 17(3), pages 352-371, June.
    5. Balduzzi, Pierluigi, 2007. "Money and asset prices in a continuous-time Lucas and Stokey cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2713-2743, August.
    6. Attilio Gardini & Giuseppe Cavaliere & Michele Costa, 1999. "A new approach to stock price modelling and the efficiency of the Italian stock exchange," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 8(1), pages 25-47, April.
    7. Christian Bauer & Bernhard Herz, 2004. "Technical trading and the volatility of exchange rates," Quantitative Finance, Taylor & Francis Journals, vol. 4(4), pages 399-415.
    8. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    9. Christian Bauer & Bernhard Herz, 2006. "Monetary and Exchange Rate Stability at the EU. Mediterranean Borders," Revue économique, Presses de Sciences-Po, vol. 57(4), pages 899-917.

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