The Dynamic Process of Price Discovery in an Equity Market

40 Pages Posted: 26 Mar 2008

See all articles by Jacob Paroush

Jacob Paroush

Bar-Ilan University - Department of Economics

Robert A. Schwartz

Baruch College - CUNY

Avner Wolf

Baruch College

Date Written: March 17, 2008

Abstract

We demonstrate that the process of discovering efficient values in equity trading introduces noise in prices. Noise plays an important role in theoretical microstructure literature, and empirical studies have documented high, U-shaped intra-day volatility that is a manifestation of noise. While implicit transaction costs and the tactical trading of informed participants in an asymmetric information environment are contributing factors, they do not provide a sufficient explanation. Accordingly, we focus on an additional factor - price discovery. Our formulation, which allows investors with divergent expectations to respond rationally to each others' valuations, implies elevated volatility even when information is common knowledge.

Suggested Citation

Paroush, Jacob and Schwartz, Robert A. and Wolf, Avner, The Dynamic Process of Price Discovery in an Equity Market (March 17, 2008). Available at SSRN: https://ssrn.com/abstract=1107431 or http://dx.doi.org/10.2139/ssrn.1107431

Jacob Paroush

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
+972.3.531.8569 (Phone)
+972.3.535.3180 (Fax)

Robert A. Schwartz (Contact Author)

Baruch College - CUNY ( email )

Zicklin School of Business
17 Lexington Avenue
New York, NY 10010
United States
646-312-3467 (Phone)
646-312-3530 (Fax)

Avner Wolf

Baruch College ( email )

One Bernard Baruch Way
New York, NY 10010
United States

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