Document Type

Article

Publication Date

5-2020

Abstract

The relationship between price volatility and expected price market extremum is examined using a fundamental economics model of supply and demand. By examining randomness through a microeconomic setting, we obtain the implications of randomness in the supply and demand, rather than assuming that price has randomness on an empirical basis. Within a general setting of changing fundamentals, the volatility is maximum when expected prices are changing most rapidly, with the maximum of volatility reached prior to the maximum of expected price. A key issue is that randomness arises from the supply and demand, and the variance in the stochastic differential equation governing the logarithm of price must reflect this. Analogous results are obtained by further assuming that the supply and demand are dependent on the deviation from fundamental value of the asset.

Comments

This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Discrete & Continuous Dynamical Systems - B, volume 25, issue 5, in 2020 following peer review. The definitive publisher-authenticated version is available online at https://doi.org/10.3934/dcdsb.2020010.

Peer Reviewed

1

Copyright

American Institute of Mathematical Sciences (AIMS)

Available for download on Friday, April 09, 2021

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