In: Economics
The current COVID-19 pandemic has caused large price reactions, for most financial assets.
- 1 -Discuss how the price reactions can be understood in the context of equilibrium asset pricing.
- in light of your answer in 1), are the shocks likely to be permanent or transitory? Hint: Cash flows, discount rates, asset classes.
- Could we have a situation where prices are permanently negatively affected, but consumers are still better of (those that didn’t lose a lot as investors)?
The equilibrium pricing in the asset market is based on the
demand for and supply of asset in the market. In current situation
rational customers are not demanding assets. The quantity of asset
supplied and the quantities of asset demanded must be equal. It is
the market clearing. At present condition the asset market is going
to depression. There is no investors come forward to demand the
assets. There is insufficient demand in the virtual market for
assets and securities.
These shocks are sometimes temporary in nature. But it is not easy
to predict the asset market at current situation. Common people and
businessman were uncertain about the lockdown and the restrictions.
This affects the production level and total output. There is a huge
cash flow can removed this disequilibrium cured in the asset
market. The discount rates and asset classes were the other
measures used to overcome this situation. Asset classes make the
asset into different classes. So on the basis of different level of
income can people can participate in the asset market.
The situation where price ne negatively affected is demand for
stocks. When the price is negatively affected permanently causes
the stock market crashes. Among different kind of shares and
securities, the negative impact affect the consumption behaviour
also. But the small investors face any negative effects from this
shock. Even the customers are also unaware of this shock. Goods
having hoarding capacity can also make this unaware situation. When
the starting period of recession most of the people were unaware
about its price and quantity. Because they are easily available to
them.