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Activity Number:
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415
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Type:
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Contributed
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Date/Time:
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Wednesday, August 6, 2003 : 2:00 PM to 3:50 PM
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Sponsor:
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Business & Economics Statistics Section
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| Abstract - #302211 |
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Title:
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Modeling the Random Demand Curve for Stock: Interacting Particle Representation Approach
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Author(s):
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Yoonjung Lee*+
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Companies:
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University of Wisconsin, Madison
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Address:
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4395 Crescent Rd. #7, Madison, WI, 53711-4800,
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Keywords:
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stochastic partial differential equation ; interacting particle approach ; illiquid market ; random demand curve
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Abstract:
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In an illiquid market traders may not be able to execute large transactions without affecting the asset price. The price impact of a large transaction is important in modeling the asset price, extending the classical Black-Scholes pricing model, and studying the optimal liquidation policy. We take a microeconomic approach to model the behaviors of investors in the economy. Investors have heterogeneous beliefs about the valuation of the asset. Their valuations are modeled as the locations of particles. Using a particle approach, we derive a stochastic differential equation for the asset price. The asset price depends on the empirical measure of investors' valuations. A stochastic partial differential equation for the empirical measure of investors' valuations is also derived. Assuming that investors' valuations follow correlated geometric Brownian motions, we obtain an explicit form of the asset price. In the presence of a large trader in the economy, the price impact of a large transaction is analyzed. The model is extended to incorporate transaction costs and build trading mechanisms.
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- The address information is for the authors that have a + after their name.
- Authors who are presenting talks have a * after their name.
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