Sunday, December 25, 2016

Stocks and k-states, part III

Adding to this post [1] on the information/statistical equilibrium picture of the stock market, I should note that the ratio $M/B$ is (one version of) "Tobin's Q", making $Q$ proportional to the stock price $p$ (or aggregate industry stock price $\Sigma_{i \in I} \; p_{i}$):

p \equiv \frac{dM}{dB} = k \; \frac{M}{B} = k \; Q

This wouldn't necessarily predict investment (per Tobin's original argument cited here), but as described in [1] can be used to understand price dynamics. The information equilibrium framework is actually agnostic about the underlying dynamics ‒ assuming only that they're algorithmically complex.

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