New Information, Trading Volume, Quantity and Asset Price: Intelligent Arbitrage Pricing Theory (I-Apt)
Posted: 9 Oct 2006
Date Written: August 2006
There are many anomalies beyond the explanation capacity of CAPM and APT. Miller and his successive researchers shed some lights on the effects of trading, but their short constraints assumption and partial equilibrium analysis rule out the contributions of pessimists to asset prices. Without the assumption of short sale constraints and irrational behavior, we provide a new model connecting the asset price with the new information, turnover and relative quantity of the asset. Our model provides an explanation for the overvaluation and undervaluation of the asset price and for the interaction between the asset price and the trading volume and relative quantity of the security. In our model, overvaluation is not a negative and useless so-called price bubble, but the rewards to exploring uncertainty. With the case of the rise and crash of the 90s internet boom, we provide an effective policy to ease the volatility of asset prices, that is, government should relax the regulation of the financial market to facilitate the adjustment of the quantity of financial assets in the market, including the stocks and the government bonds.
Keywords: speculative, trading volume, short sale constraints, asset pricing, law of one price
JEL Classification: D84, D82, G12, G14
Suggested Citation: Suggested Citation