Changes Versus Levels in My Asset Pricing Theory

changes

In my previous post a commenter, ivansml, made a point about one of the first equations in my paper. He was discussing the following equation,

eq1Ivansml pointed out that this was problematic because in order for the change in price — Pftpft-1 — to be negative, expenditure — Eft — had to be negative, which is nonsensical. He is quite correct. After a bit of back and forth I think we realised what the problem here is: I’m confusing levels and changes.

The correct equation for the price change would be as follows,

eq2Or, more simply,

eq3This makes the equations that follow make far more sense, as we convert the change in expenditure into changes in price expectations. This does raise the issue that when I introduce my supply-side and ‘real’ demand-side variables these should also probably be expressed as changes. I will consider this when I try to alter these in line with the self-criticisms laid out in my previous post.

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About pilkingtonphil

Philip Pilkington is a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University. You can follow him on Twitter at @pilkingtonphil.
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