A study of the diffusion of asset prices: the determinants of asset price diffusion and a practical model of asset price diffusion for use in portfolio management

Working paper

Phillips, Peter J.. 2009. A study of the diffusion of asset prices: the determinants of asset price diffusion and a practical model of asset price diffusion for use in portfolio management. Unpublished.
Title

A study of the diffusion of asset prices: the determinants of asset price diffusion and a practical model of asset price diffusion for use in portfolio management

Report TypeWorking paper
Authors
AuthorPhillips, Peter J.
Institution of OriginUniversity of Southern Queensland
Number of Pages24
Year2009
PublisherUnpublished
Abstract

[Abstract]: Brownian motion and diffusion processes have found considerable application in modern finance theory. In this paper, the diffusion coefficients of stock prices for the S&P/ASX300 are computed and analysed. Reasoning by analogy (from theoretical physics), market capitalisation and liquidity are identified as two variables that may be expected to explain the variance of the diffusion coefficients of stock prices. The analysis presented herein reveals that the actual relationship between these variables is not in accordance with expectations of the directions of the relationships derived by reasoning from physics to finance. In addition, the utilisation of asset price diffusion coefficients in portfolio management is discussed. Diffusion coefficients may play an extremely useful role in practice as ‘transition probabilities’: the probability that a particular change in the asset’s price will be observed in a particular period of time and may be used to compute the expected value of a price movement.

Keywordsasset prices, diffusion, portfolio management
ANZSRC Field of Research 2020380107. Financial economics
Public Notes

Unpublished.

Byline AffiliationsDepartment of Finance and Banking
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