Asset Price Dynamics with Limited Attention
23rd Australasian Finance and Banking Conference 2010 Paper
49 Pages Posted: 1 Aug 2010 Last revised: 17 Jan 2018
Date Written: January 15, 2018
Inattention can significantly distort security prices. We develop a structural model with stochastic investor inattention and private value shocks that net to zero across investors. We solve the model analytically and estimate its parameters with NYSE data. The model is able to explain the empirical relations among market-maker inventories, retail order flows, and stock returns from daily to monthly frequencies. The structural estimation further identifies pricing errors. These errors distort prices by 2.9 percentage points and have a half-life of 3.0 weeks. The 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