ch10Problems

# ch10Problems - nomic theory 3 Explain what is meant by...

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T HE E CONOMICS OF F INANCIAL M ARKETS R. E. B AILEY Exercises for Chapter 10 Present value relationships and price variability 1. Suppose that the relationship between the rate of interest, dividends and an asset price is given by: r t + i +1 = d t + i +1 p t + i + p t + i +1 - p t + i p t + i . This equality is assumed to hold for all dates i = 0 , 1 , 2 , . . . , T . Derive the NPV for this asset (i.e., p t as a function of the future stream of dividends and interest rates) bearing in mind that the rate of interest is not required to be constant. Discuss the implications of allowing T → ∞ . 2. Why is it sometimes claimed that stock prices are “too volatile” to be compatible with eco-
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Unformatted text preview: nomic theory? 3. Explain what is meant by “noise trading”. How can the presence of noise traders account for highly volatile stock prices? 4. What is an asset price bubble? Provide some illustrations of historical episodes that might be interpreted as bubbles. How can asset price bubbles be explained? 5. Explain what is meant by a “Ponzi scheme”. Describe the circumstances necessary for a successful Ponzi scheme (i.e., one that does not collapse in ﬁnite time). *****...
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