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
Date Written: June 11, 2018
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: Suggested Citation