Two Trees: Asset Price Dynamics Induced by Market Clearing

Topics:
Investment and Capital Markets
Tags:
Asset,
Asset Management,
Asset Price,
Business Operations,
Finance,
Financial Accounting,
Investor,
National Bureau Of Economic Research,
Operational Planning
Source:
National Bureau of Economic Research

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Overview: If stocks go up, investors may want to rebalance their portfolios. But investors cannot all rebalance. Expected returns may need to change so that the average investor is still happy to hold the market portfolio despite its changed composition. In this way, simple market clearing can give rise to complex asset market dynamics. This paper studies this phenomenon in a very simple model. The model has two Lucas trees.' Each tree has i.i.d.dividend growth, and the representative investor has log utility.

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Format: PDF | Size: 636KB | Date: Nov 2003 | Pages: 46

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