UniversitÄat Bonn

This paper studies a class of di®usion models for stock prices derived by a microeco-nomic approach. We consider discrete-time processes resulting from a market equilibrium and then apply an invariance principle to obtain a continuous-time model. The resulting process is an Ornstein-Uhlenbeck process in a random environment, and we analyze its qualitative behavior. In particular, we provide simple criteria for the stability or instabil-ity of the corresponding stock price model, and we give explicit formulae for the invariant distributions in the recurrent case. Key words: stock price models, invariance principle, Ornstein-Uhlenbeck process, random environment, invariant distribution, noise traders, information traders 1