Distribution of the Asset Price Movement and Market Potential

6 Pages Posted: 14 Mar 2014

See all articles by Dong Han Kim

Dong Han Kim

Dongguk University

Stefano Marmi

Scuola Normale Superiore

Date Written: March 12, 2014

Abstract

In this article we discuss the distribution of asset price movements by the market potential function. From the principle of free energy minimization we analyze two different kinds of market potentials. We obtain a U-shaped potential when market reversion (i.e. contrarian investors) is dominant. On the other hand, if there are more trend followers, flat and logarithmic-like potentials appeared. By using the Cyclical Adjusted Price-to-Earning ratio, which is a common valuation tool, we empirically investigate the market data. By studying long term data we observe the historical change of the market potential of the US stock market. Recent US data shows that the market potential looks more likely as the trending followers' potential. Next, we compare the market potentials for 12 different countries. Though some countries have similar market potentials, there are specific examples like Japan which exhibits very flat potential.

Suggested Citation

Kim, Dong Han and Marmi, Stefano, Distribution of the Asset Price Movement and Market Potential (March 12, 2014). Available at SSRN: https://ssrn.com/abstract=2408239 or http://dx.doi.org/10.2139/ssrn.2408239

Dong Han Kim (Contact Author)

Dongguk University ( email )

26 Pil-dong 3-ga
Jung-gu
Seoul, Seoul 100-715
Korea, Republic of (South Korea)

Stefano Marmi

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy
+39050509064 (Phone)
+39050563513 (Fax)

HOME PAGE: http://homepage.sns.it/marmi/

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