"Price Barriers" and the Dynamics of Asset Prices in Equilibrium

27 Pages Posted: 7 Nov 2008

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

David J. Hait

OptionMetrics

Date Written: November 1996

Abstract

In a variety of realistic scenarios, some investors trade infrequently rather than continuously, basing their buy or sell decisions on current price levels. A â¬Sprice barrierâ¬? 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 with infrequent traders and price barriers. Our analysis predicts that when price barriers exist, both asset prices and price volatility can jump at the time the price barrier is reached, even if the trade is rationally anticipated. Moreover, the direction of the price jump may very well be the opposite of what one would expect. A price-triggered purchase may generate a downward jump in stock prices and, vice versa, a price-triggered sale may induce stock prices to jump above the price barrier. This is because trades affect prices before they are implemented: the anticipation of a stock purchase inflates stock prices, while the anticipation of a stock sale depresses stock prices. In the case of repeated trades, before-trade prices anticipate not only the next trade, but also the following ones. This may lead to the counterintuitive result that stock prices are inflated rather than depressed, in the proximity of a stock sale.

Suggested Citation

Balduzzi, Pierluigi and Foresi, Silverio and Hait, David J., "Price Barriers" and the Dynamics of Asset Prices in Equilibrium (November 1996). NYU Working Paper No. FIN-96-011, Available at SSRN: https://ssrn.com/abstract=1297101

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group ( email )

32 Old Slip, 24th Floor
New York, NY 10005
United States
(212) 357-3508 (Phone)

David J. Hait

OptionMetrics ( email )

1776 Broadway
Suite 1800
New York, NY New York 100192014
United States
2127078370 (Phone)
2127078495 (Fax)

HOME PAGE: http://www.optionmetrics.com

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