(Joint work with John Aquilina)

Abstract:

Why does a share have value? How is that value determined? These
are basic questions which get assumed away in the Black-Scholes
world, but to which economists have perfectly satisfactory answers,
in terms of a general equilibrium of a dynamic market. General
equilibrium is both easy (to explain and understand) and difficult
(to illustrate with explicit examples). This talk (which is
mainly pedagogical in aim) analyses a simple example where many
of the things we are interested in (such as the equilibrium prices
of bonds, shares, and more general financial instruments) can be
solved in closed form (in terms of generalised hypergeometric
functions). Some rudimentary fitting to yield curve data suggests
that the resulting models could be of practical value.