Asset Price Dynamics with Limited Attention

23rd Australasian Finance and Banking Conference 2010 Paper

54 Pages Posted: 1 Aug 2010 Last revised: 17 Jun 2018

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Remy Praz

Copenhagen Business School - Department of Finance

Mark S. Seasholes

ASU WP Carey School of Business

Date Written: June 11, 2018

Abstract

We identify long-lived pricing errors through a model in which inattentive investors arrive stochastically to trade. The model’s parameters are structurally estimated using daily NYSE market-maker inventories, retail order flows, and prices. The estimated model fits empirical variances, autocorrelations, and cross-autocorrelations among our three data series from daily to monthly frequencies. Pricing errors for the typical NYSE stock have a standard deviation of 2.9 percentage points and a half-life of 3.0 weeks. These pricing errors account for 27% of daily and 19% of monthly idiosyncratic return variances.

Keywords: Transitory Volatility, Limited Attention, Individuals, Institutions, Market Makers

JEL Classification: G12, G14

Suggested Citation

Hendershott, Terrence and Menkveld, Albert J. and Praz, Remy and Seasholes, Mark S., Asset Price Dynamics with Limited Attention (June 11, 2018). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1651098 or http://dx.doi.org/10.2139/ssrn.1651098

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Albert J. Menkveld (Contact Author)

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Remy Praz

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Mark S. Seasholes

ASU WP Carey School of Business ( email )

Dept of Finance, BAC 501
400 E. Lemon St.
Tempe, AZ 85287-3906
United States

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