23rd Australasian Finance and Banking Conference 2010 Paper
56 Pages Posted: 1 Aug 2010 Last revised: 10 Jan 2014
Date Written: January 3, 2014
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: 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