A Comprehensive Model of Stock Prices: The Role of Bonds, Stocks, and Adaptive Expectations
Year: 2025
Type: article
Abstract: This research develops a straightforward financial market model featuring a single bond and a single stock, each governed by basic pricing formulas. By applying techniques for solving differential equations, the paper demonstrates that under very mild assumptions—such as the absence of arbitrage opportunities and rational investor behavior—the stock price converges to its fundamental value over time. These assumptions ensure that expected returns from the bond and the stock align, illustrating how stock prices adjust in response to market dynamics. The focus is on the application of differential equations to show how the stock price moves toward its intrinsic value. It also provides insights into investor's behavior and market adjustments.
Author: Junlin Li
Institution: Vanderbilt University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
OpenAlex ID: W4409236736