Abstract
This chapter studies the evolution of prices and trading volume in a model involving two securities, a risky security (the market portfolio) and a risk-free security. This model addresses the question like how representativeness affects security prices and trading volume. This model also serves to set the stage for the discussion of long-run survival. The chapter first helps in developing the model. The chapter focuses on security prices and on trading volume. Subsequently, the examples of this model are also provided. The chapter discusses the relationship between the underlying state prices and the prices and returns associated with the risky and risk-free securities. The chapter describes the equilibrium portfolio strategies for a market involving trade in a risky security and a risk-free security, when one investor is a trend follower and the other investor succumbs to gambler's fallacy. A key issue in the chapter involves the relationship between trading volume and the changes in beliefs stemming from the different transition probabilities employed by the investors.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
