Hostname: page-component-848d4c4894-75dct Total loading time: 0 Render date: 2024-05-07T06:14:20.165Z Has data issue: false hasContentIssue false
  • English
  • Français

Price Barriers and the Dynamics of Asset Prices in Equilibrium

Published online by Cambridge University Press:  06 April 2009

Pierluigi Balduzzi ,
Silverio Foresi  and
David J. Hait
Pierluigi Balduzzi
Affiliation:
Finance Department, Stern School of Business, New York University, New York, NY 10012
Silverio Foresi
Affiliation:
Finance Department, Stern School of Business, New York University, New York, NY 10012
David J. Hait
Affiliation:
Finance Department, Stern School of Business, New York University, New York, NY 10012
Get access Rights & Permissions [Opens in a new window]

Abstract

A price barrier is a price level at which a large number of investors either buy or sell securities. We analyze the dynamics of asset prices in an economy in which price barriers exist. Our analysis suggests that asset prices and volatility can exhibit jumps when the price barrier is reached. Interestingly, the market's anticipation of future trades can influence prices in the opposite direction from what one might expect. For example, when multiple barriers exist, stock prices can be inflated, rather than depressed, in the proximity of an anticipated stock sale.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 32 , Issue 2 , June 1997 , pp. 137 - 159
Copyright
Copyright © School of Business Administration, University of Washington 1997

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R., and Pfleiderer, P.. “Sunshine Trading and Financial Market Equilibrium.” Review of Financial Studies, 4 (1991), 443–481.CrossRefGoogle Scholar
Ahn, C. M., and Thompson, H. E.. “Jump-Diffusion Processes and the Term-Structure of Interest Rates.” Journal of Finance, 43 (1988), 155–174.Google Scholar
Balduzzi, P.; Bertola, G.; and Foresi, S.. “Asset Price Dynamics and Infrequent Feedback Trades.” Journal of Finance, 50 (1995), 1747–1766.CrossRefGoogle Scholar
Ball, C., and Torous, W.. “On Jumps in Common Stock Prices and Their Impact on Call Pricing.” Journal of Finance, 40 (1985), 155–173.CrossRefGoogle Scholar
Basak, S. “A General Equilibrium Model of Portfolio Insurance.” Review of Financial Studies, 8 (1995), 1059–1090.CrossRefGoogle Scholar
Bjerring, J. H.; Lakonishok, J.; and Vermaelen, T.. “Stock Prices and Financial Analysts's Recommendations.” Journal of Finance, 38 (1983), 187–204.CrossRefGoogle Scholar
Blume, L.; Easley, D.; and O'Hara, M.. “Market Statistics and Technical Analysis: The Role ofVolume.” Journal of Finance, 49 (1994), 153–181.CrossRefGoogle Scholar
Bollerslev, T.; Chou, R. Y.; and Kroner, K. F.. “ARCH Modeling in Finance: A Review of the Theory and Empirical Evidence.” Journal of Econometrics, 52 (1992), 5–60.CrossRefGoogle Scholar
Brown, K. C.; Harlow, W. V.; and Tinic, S. M.. “The Risk and Required Return of Common Stock following Major Price Innovations.” Journal of Financial and Quantitative Analysis, 28 (1993), 101–116.CrossRefGoogle Scholar
Campbell, J. Y., and Kyle, A. S.. “Smart Money, Noise Trading, and Stock Price Behavior.” Review of Economic Studies, 60 (1993), 1–34.CrossRefGoogle Scholar
Constantinides, G. M. “Capital Market Equilibrium with Transactions Costs.” Journal of Political Economy, 94 (1986), 842–862.CrossRefGoogle Scholar
Davis, M. H. A., and Norman, A. R.. “Portfolio Selection with Transactions Costs.” Mathematics of Operations Research, 15 (1990), 677–713.CrossRefGoogle Scholar
DeLong, J. B.; Shleifer, A.; Summers, L. H.; and Waldmann, R. J.. “Positive Feedback Investment Strategies and Destabilizing Rational Speculation.” Journal of Finance, 45 (1990), 379–396.CrossRefGoogle Scholar
Dixit, A. “The Art of Smooth Pasting.” Chur, Switzerland: Harwood Academic Publishers (1993).Google Scholar
Donaldson, R. G., and Kim, H. Y.. “Price Barriers in the Dow Jones Industrial Average.” Journal of Financial and Quantitative Analysis, 28 (1993), 313–330.CrossRefGoogle Scholar
Donaldson, R. G., and Uhlig, H.. “The Impact of Large Portfolio Insurers on Asset Prices.” Journal of Finance, 48 (1993), 1943–1955.CrossRefGoogle Scholar
Duffie, D., and Sun, T.. “Transactions Costs and Portfolio Choice in a Discrete-Continuous-Time Setting.” Journal of Economic Dynamics and Control, 14 (1990), 35–51.CrossRefGoogle Scholar
Dybvig, P. H. “Ratcheting, Consumption and Portfolios” Review of Economic Studies, 62 (1995), 287–313.CrossRefGoogle Scholar
Gennotte, G., and Leland, H.. “Market Liquidity, Hedging, and Crashes.” American Economic Review, 80 (1990), 999–1021.Google Scholar
Grossman, S. J., and Zhou, Z.. “Equilibrium Analysis of Portfolio Insurance.” Journal of Finance, 51 (1996), 1379–1403.CrossRefGoogle Scholar
Jarrow, R., and Rosenfeld, E.. “Jump Risks and the Intertemporal Capital Asset Pricing Model.” Journal of Business, 57 (1984), 337–351.CrossRefGoogle Scholar
Jorion, P. “On Jump Processes in the Foreign Exchange and Stock Markets.” Review of Financial Studies, 1 (1988), 427–445.CrossRefGoogle Scholar
Ley, E., and Varian, H. R. “Are There Psychological Barriers in the Dow-Jones Index?” Applied Financial Economics, 4 (1994), 217–224.CrossRefGoogle Scholar
Merton, R. C. “Optimum Consumption and Portfolio Rules in a Continuous Time Model.” Journal of Economic Theory, 3 (1971), 373–413.CrossRefGoogle Scholar
Merton, R. C. “Option Pricing when Underlying Stock Returns are Discontinuous.” Journal of Financial Economics, 3 (1976), 125–144.CrossRefGoogle Scholar
Naik, V., and Lee, M.. “General Equilibrium Pricing of Options on the Market Portfolio with Discontinuous Returns.” Review of Financial Studies, 3 (1990), 493–522.CrossRefGoogle Scholar
Neftci, S. N. “Naive Trading Rules in Financial Markets and Wiener-Kolmogorov Prediction Theory: A Study of Technical Analysis.” Journal of Business, 64 (1991), 549–571.CrossRefGoogle Scholar
Nelson, D. B. “ARCH Models as Diffusion Approximations.” Journal of Econometrics, 45 (1990), 7–38.CrossRefGoogle Scholar
Shleifer, A., and Summers, L. H.. “The Noise Trader Approach in Finance.” Journal of Economic Perspectives, 4 (1990), 19–33.CrossRefGoogle Scholar
Stickel, S. E. “The Influence of Brokerage House Buy and Sell Recommendations on Stock Prices.” Working Paper, La Salle Univ. (1995).CrossRefGoogle Scholar
Womack, K. L. “Do Brokerage Analysts' Recommendations Have Investment Value?” Journal of Finance, 51 (1996), 137–167.CrossRefGoogle Scholar