Asset Price Dynamics with Limited Attention

73 Pages Posted: 1 Aug 2010 Last revised: 14 Dec 2020

See all articles by Terrence Hendershott

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Albert J. Menkveld

Vrije Universiteit Amsterdam; Tinbergen Institute

Remy Praz

Copenhagen Business School - Department of Finance

Mark S. Seasholes

ASU WP Carey School of Business

Date Written: December 8, 2020

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 3.2 percentage points and a half-life of 6.2 weeks. These pricing errors account for 9.4%, 7.0%, and 4.5% of the respective daily, monthly, and quarterly idiosyncratic return variances.

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

JEL Classification: G12, G14

Suggested Citation

Hendershott, Terrence J. and Menkveld, Albert J. and Praz, Remy and Seasholes, Mark S., Asset Price Dynamics with Limited Attention (December 8, 2020). 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)

Vrije Universiteit Amsterdam ( email )

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

Tinbergen Institute ( 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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