Stochastic asset price dynamics and volatility using a symmetric supply and demand price equation

Carey Caginalp and Gunduz Caginalp

Physica A: Statistical Mechanics and its Applications, 2019, vol. 523, issue C, 807-824

Abstract: A symmetric supply/demand model of price dynamics is developed and used to understand the relationship between price change and volatility. This differs from the classical approach in which the expected rate of price change and variance are assumed to be independent. The microeconomic and stochastic analysis leads to the conclusion that a particular measure of the marginal volatility has a minimum shortly before the expected log-price has an extremum. The maximum of the volatility occurs when prices are likely to change most rapidly, and the supply/demand imbalance is greatest. The great bubble and collapse of Bitcoin’s price serves as a test of this analysis. The volatility reached a minimum shortly prior to the peak of Bitcoin’s price in December 2018. The model is further developed under the assumption that supply and demand depend on the fundamental value of the asset. Thus the paper is a key step in understanding the issue of whether volatility highs and lows can forecast trading price tops and bottoms. The methodology can be extended beyond log-normal returns and is further compared with an empirical study of 40 sharp market boom/bust events studied by Sornette et. al. (2017).

Keywords: Mathematical finance; Supply and demand; Mathematical economics; Quotient of normals; Stochastic equations; Market dynamics; Variance extrema; Price maximum and minimum (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S037843711930202X
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:523:y:2019:i:c:p:807-824

DOI: 10.1016/j.physa.2019.02.049

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().