SFB 303 Discussion Paper No. B-264

Author: Föllmer, Hans
Title: Stock Price Fluctuation as a Diffusion in a Random Environment
Abstract: The fluctuation of stock prices is modelled as a sequence of temporary equilibria on a financial market with different types of agents. We summarize joint work with M. Schweizer on the class of Ornstein-Uhlenbeck processes in a random environment which appears in the diffusion limit. Moreover, we show how the random environment may be generated by the interaction of a large set of agents modelled by Markov chains as they appear in the theory of probabilistic cellular automata.
Keywords: asset prices, temporary equilibria, noise traders, random environment, hedging, probabilistic cellur automata
JEL-Classification-Number: G10, D52, D84
Creation-Date: December 1993
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