Asset Price Dynamics with Limited Attention

Review of Financial Studies (forthcoming)

73 Pages Posted: 1 Aug 2010 Last revised: 10 May 2021

See all articles by Terrence Hendershott

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Albert J. Menkveld

Vrije Universiteit Amsterdam

Remy Praz

Copenhagen Business School - Department of Finance

Mark S. Seasholes

Arizona State University (ASU)

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). Review of Financial Studies (forthcoming), 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)

Remy Praz

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Mark S. Seasholes

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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