S. C. Kou and S. G. Kou
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.
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