Instantaneous self-fulfilling of long-term prophecies on the probabilistic distribution of financial asset values

Lasry, Jean-Michel; Lions, Pierre-Louis

Lasry, Jean-Michel; Lions, Pierre-Louis (2007), Instantaneous self-fulfilling of long-term prophecies on the probabilistic distribution of financial asset values, Annales de l'Institut Henri Poincaré (C) Analyse non linéaire, 24, 3, p. 361-368. http://dx.doi.org/10.1016/j.anihpc.2005.12.005

Type

Article accepté pour publication ou publié

Date

2007

Journal name

Annales de l'Institut Henri Poincaré (C) Analyse non linéaire

Volume

Number

Publisher

Elsevier

Pages

361-368

Abstract (EN)

Our goal here is to present various examples of situations where a “large” investor (i.e. an investor whose “size” challenges the liquidity or the depth of the market) sees his long-term guesses on some important financial parameters instantaneously confirmed by the market dynamics as a consequence of his trading strategy, itself based upon his guesses. These examples are worked out in the context of a model (i.e. a quantitative framework) which attempts to provide a rigorous basis for the qualitative intuitions of many practitioners. Our results may be viewed as some kind of reverse Black–Scholes paradigm where modifications of option prices affect today's real volatility.

Subjects / Keywords

trading strategy; market dynamics; guesses; Black–Scholes paradigm; option prices

JEL

G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading Volume; Bond Interest Rates