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Asset Price Dynamics with Limited Attention

23rd Australasian Finance and Banking Conference 2010 Paper

56 Pages Posted: 1 Aug 2010 Last revised: 10 Jan 2014

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Sunny X. LI

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

Albert J. Menkveld

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

Mark S. Seasholes

Hong Kong University of Science & Technology (HKUST)

Date Written: January 3, 2014

Abstract

We study how limited attention and inefficient risk sharing relate to stock prices deviating from a (random walk) efficient price. The Duffie (2010) inattention model is extended to include multiple investor types with varying attention levels. The model’s predictions are tested with New York Stock Exchange data. Eight percent of a stock’s daily idiosyncratic return variance and 25% of its monthly idiosyncratic variance are due to transitory price changes. The trading variables explain 32% of these changes. The model further explains contemporaneous, lead, and lag correlations among returns and the trading by institutions, individuals, and market makers.

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

JEL Classification: G12, G14

Suggested Citation

Hendershott, Terrence and LI, Sunny X. and Menkveld, Albert J. and Seasholes, Mark S., Asset Price Dynamics with Limited Attention (January 3, 2014). 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

Xiaoyue Li

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

Albert J. Menkveld (Contact Author)

VU University 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

Mark S. Seasholes

Hong Kong University of Science & Technology (HKUST) ( email )

Clear Water Bay, Kowloon
Hong Kong
+852 2358-7668 (Phone)

HOME PAGE: http://www.seasholes.com

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