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Asset Price Volatility and Price Extrema

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  • Carey Caginalp
  • Gunduz Caginalp

Abstract

The relationship between price volatilty and a market extremum is examined using a fundamental economics model of supply and demand. By examining randomness through a microeconomic setting, we obtain the implications of randomness in the supply and demand, rather than assuming that price has randomness on an empirical basis. Within a very general setting the volatility has an extremum that precedes the extremum of the price. A key issue is that randomness arises from the supply and demand, and the variance in the stochastic differential equation govening the logarithm of price must reflect this. Analogous results are obtained by further assuming that the supply and demand are dependent on the deviation from fundamental value of the asset.

Suggested Citation

  • Carey Caginalp & Gunduz Caginalp, 2018. "Asset Price Volatility and Price Extrema," Papers 1802.04774, arXiv.org, revised Jul 2018.
    • Handle: RePEc:arx:papers:1802.04774
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    3. Caginalp, Carey & Caginalp, Gunduz, 2018. "The quotient of normal random variables and application to asset price fat tails," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 499(C), pages 457-471.
    4. Eloísa Díaz-Francés & Francisco Rubio, 2013. "On the existence of a normal approximation to the distribution of the ratio of two independent normal random variables," Statistical Papers, Springer, vol. 54(2), pages 309-323, May.
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    Cited by:

    1. Artur Sokolovsky & Luca Arnaboldi, 2020. "A Generic Methodology for the Statistically Uniform & Comparable Evaluation of Automated Trading Platform Components," Papers 2009.09993, arXiv.org, revised Jun 2022.
    2. Caginalp, Carey & Caginalp, Gunduz, 2019. "Stochastic asset price dynamics and volatility using a symmetric supply and demand price equation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 807-824.

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