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Asset Price Dynamics by Economic Forces
We model the evolution of an asset price. Investors in stock market are assumed to use a subjective information in making their expectations of future asset prices. Security trading takes place according to investors’ expectations of the rates of return of investing in different assets, and asset prices change in the perfectly competed market according to excess demand or supply. We define the ‚force‘ acting upon an asset price and show that the adjustment may be stable or unstable. The possible equilibrium asset price is conditional on the distribution of expectations of individual investors.
1 Introduction
The concept of equilibrium in economics was borrowed from physics by Canard at 1801. Although equilibrium is a balance of forces situation, in economics the balancing ‚forces‘ in different situations have not been defined. In order to efficiently exploit the concept of equilibrium, however, we should distinguish whether the equilibrium is stable or not, and to understand the adjustment process, we should define the forces which ‚push‘ economic quantities toward their equilibrium states or cause their evolution with time.
The use of the term ‚force‘ as the cause of a change in an e...