Asset Market Equilibrium
Asset market equilibrium refers to the point at which the demand for and supply of financial assets, such as stocks and bonds, are in balance. At this equilibrium, the price of the assets reflects all available information and there is no incentive for investors to change their portfolios. This concept is crucial for understanding the pricing and allocation of financial assets in the economy.
3 Key excerpts on "Asset Market Equilibrium"
eBook - ePubInflation in China
Microfoundations, Macroeconomic Dynamics, and Monetary Policy
- Chengsi Zhang(Author)
- 2020(Publication Date)
- Routledge(Publisher)
...For the sake of a simple explanation, real estate can be used as a representative of real capital goods assets, and P is used to denote its price. Obviously, both individuals and institutions consider how to arrange these three financial assets for optimization. Therefore, changing the weights of the three assets under different market conditions is not necessarily an act of financial speculation. In most cases, this should be seen as a rational choice. Under this condition, the markets of three different assets can be harmonized into a comprehensive Asset Market Equilibrium framework. Figure 7.1 demonstrates the basic logic of this Asset Market Equilibrium analysis. First of all, in the coordinates system in which the horizontal axis represents the price of real assets (namely, real estate) P, and the vertical axis represents the interest rate level r, the money market equilibrium line MM and the securities market equilibrium line SM intersect at the point (P 0,r 0), which indicates the corresponding real estate prices and interest rates when the markets of three assets reach equilibrium simultaneously. Secondly, the positions of the lines MM and SM are linked to factors such as the holding of different assets, the performance of the real economy, commodity prices, and market expectations. On the whole, real estate prices and interest rates in the state of equilibrium are determined by the market supply and demand for different assets. Figure 7.1 Asset Market Equilibrium analysis framework. For the line MM, if the interest rate level and the corresponding real estate price are given, the slope of the line MM indicates the market’s willingness to hold monetary assets. When the interest rate rises, the market demand for money will fall...
eBook - ePub- Robert E. Lucas Jr., Max Gillman, Max Gillman(Authors)
- 2013(Publication Date)
- Harvard University Press(Publisher)
...2 Asset Prices in an Exchange Economy 1. Introduction 1 This paper is a theoretical examination of the stochastic behavior of equilibrium asset prices in a one-good, pure exchange economy with identical consumers. The single good in this economy is (costlessly) produced in a number of different productive units; an asset is a claim to all or part of the output of one of these units. Productivity in each unit fluctuates stochastically through time, so that equilibrium asset prices will fluctuate as well. Our objective will be to understand the relationship between these exogenously determined productivity changes and market determined movements in asset prices. Most of our attention will be focused on the derivation and application of a functional equation in the vector of equilibrium asset prices, which is solved for price as a function of the physical state of the economy. This equation is a generalization of the Martingale property of stochastic price sequences, which serves in practice as the defining characteristic of market “efficiency,” as that term is used by Fama [7] and others. The model thus serves as a simple context for examining the conditions under which a price series’ failure to possess the Martingale property can be viewed as evidence of non-competitive or “irrational” behavior. The analysis is conducted under the assumption that, in Fama’s terms, prices “fully reflect all available information,” an hypothesis which Muth [13] had earlier termed “rationality of expectations.” As Muth made clear, this hypothesis (like utility maximization) is not “behavioral”: it does not describe the way agents think about their environment, how they learn, process information, and so forth. It is rather a property likely to be (approximately) possessed by the outcome of this unspecified process of learning and adapting...
eBook - ePub- Ralph Turvey(Author)
- 2022(Publication Date)
- Routledge(Publisher)
...Chapter 6 EQUILIBRIUM, PRICES, DEMAND AND SUPPLY DOI: 10.4324/9781003283225-6 6.1. Equilibrium as an analytical device In an earlier chapter the approach via one thing at a time was introduced. It was explained that although other things rarely are equal, the unrealistic assumption that they are is nevertheless a useful aid to thought. We now come to the concept of equilibrium, a notion whose use ought to be viewed in the same way. The point about equilibrium is that whether or not it frequently exists in practice, the assumption that it exists is an aid to reasoning. Equilibrium in a market is a state of affairs which is not subject to disruption by internal forces. It may involve no change at all, or it may involve steady growth or decline; in either case there is consistency between the plans and expectations of the buyers and of the sellers. Its opposite is disequilibrium. This exists, for example, if: - some of the sellers are losing money and will eventually cease to supply; - purchases continually exceed production, so that stocks in the hands of sellers are continually falling; - orders continually exceed deliveries, so that unfilled orders are continually growing. Economic theorists use the concept of equilibrium in a market as follows. They first suppose an equilibrium to exist. They next assume some external factor to be different - we can take as an example the existence of value added tax on the product. Then they work out what the equilibrium state of affairs would be under this alternative assumption. Finally they compare the two equilibria, regard the differences between them as the consequence of value added tax, and say that this, that, and the other are the effects of purchase tax. If the two equilibria which are thus compared are stationary equilibria, as in most textbook theory, the approach is called ‘Comparative Statics’...
