Population Model Of Financial Markets And Asset Pricing Research

The financial market consists of various persons.However,there are twocontradicting theories of the macro effect of the micro behaviors:the representativemodel and the collective model.The representative model is the basic of the freecapitalism and neo-classic economy theory,where the demand curve and the supplycurve have one and only one stable point of intersection.The mechanism of therepresentative model is the complete arbitrage,henceforth the efficient markethypothesis (EMH) can be tenable (Fama 1976,1991) and the Black-Scholes (BS)model is right(Hell,2000).In an efficient market,the bubbles and crashes must bespecifically introduced (Frisch,1933).However,the representative model doesn'tallow a jump bigger than the noise source,and the financial crisis has no reasonableexplanation in the EMH framework (Chen,2002).On the contrary,Marshall (1920) firstly noticed the unstable multi-equilibrium,and the collected behavior is not a market clearing.The behavioral finance theoryemphasizes the crucial influence of the human psychology and behavior to the market,and the financial crisis is endogenous (De Long,Shleifer,1990).However,togetherwith other models such as BAPM (Shefiin,Statman,1994),behavioral finance hastoo many invisible parameters.Similarly,the Keynesian theory of crisis (Minsky1975,1982) lacks numerical evidences.In fact,it is possible to deduce the micro foundation via macro observationwithout parameters.Chen(2002) found that the collective process,birth-death process,is the better description of the financial market than Brownian motion and randomwalk.Li (2002) and Chen(2004,2005) also gives the empirical evidences.This thesis begins with the micro mechanism of collective behavior.Beckerguessed an S-shape demand curve in 1991,which can meet the dynamics of thefeed-back of Minsky and De Long theories.Unfortunately,Becker's S-shape curvelacks theory and cannot meet some important facts.Therefore this thesis tries to buildtheory for the S-shape demand curve first.Sudden changes in demand for fashiongoods are a typical phenomenon in social psychology.Fashion behavior can becharacterized as an'in-or-out'open market.A dynamic optimization model isintroduced for modeling social rationality where social interactions among populationmembers would change people's attitudes toward fashion goods.Consumer'stransition probability depends on competition between neighbor attraction and over-crowding.The resulted S-shape demand curve (Becker 1991) is discontinuous atthe positive-sloped part.When the intensity of social influence is weak,the S-shapedemand curve will be degenerated into a negative-sloped normal demand curve.Theoretically,this thesis doesn't make any presumption that the market follows aparticular model.The direct observation shows that the behavior of the marketdepends on the market state,which means that the collective model is right.Using ageneral master equation of stochastic process,the observation leads to a collectiveprocess:the birth-death process.This thesis then develops the non-linear dynamics of collective behavior and theempirical description of the collective behavior with high-moment premium.Thesetechniques are available in at least two scenarios.First,in this non-linear model,all the moments are collective results of traders,and arbitrage can't separate trend from the"noise".Therefore the Black-Scholes (BS)model has a bias about the assumed separation ability.This bias has a smallimperfection in a peace time,and can disable the model in a volatile era.This thesisalso finds that history,expectation,and power do matter in the financial market.Ageneral optionpricing model is then developed,so as to pricing options better than theBS model by resolving the Mythofthe BS Extreme Pricing.Second,financial crisis can be seen as an endogenous phenomenon.Theoreticallyand empirically,this thesis shows that the trend collapse and the high-moment divergeare the dynamic criteria of financial crisis.In another word,it isn't the noise of Frisch,but the collective behavior driving the mechanism of the financial crisis.