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Modeling growth stocks via birth-death processes

Part of: Stochastic analysis Mathematical economics

Published online by Cambridge University Press:  01 July 2016

S. C. Kou  and
S. G. Kou
S. C. Kou*
Affiliation:
Harvard University
S. G. Kou*
Affiliation:
Columbia University
*
∗ Postal address: Department of Statistics, Science Center 603, Harvard University, Cambridge, MA 02138, USA.
∗∗ Postal address: Department of IEOR, 312 Mudd Building, Columbia University, New York, NY 10027, USA. Email address: [email protected]
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Abstract

The inability to predict the future growth rates and earnings of growth stocks (such as biotechnology and internet stocks) leads to the high volatility of share prices and difficulty in applying the traditional valuation methods. This paper attempts to demonstrate that the high volatility of share prices can nevertheless be used in building a model that leads to a particular cross-sectional size distribution. The model focuses on both transient and steady-state behavior of the market capitalization of the stock, which in turn is modeled as a birth-death process. Numerical illustrations of the cross-sectional size distribution are also presented.

Keywords

Biotechnology and internet stocksasset pricingconvergence ratevolatilitypower-type distributionZipf's lawPareto distributionregression

MSC classification

Primary: 60H30: Applications of stochastic analysis (to PDE, etc.) 91B70: Stochastic models
Type
General Applied Probability
Information
Advances in Applied Probability , Volume 35 , Issue 3 , September 2003 , pp. 641 - 664
Copyright
Copyright © Applied Probability Trust 2003 

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