Price Discovery in the Small and in the Large: Momentum and Reversal, Bubbles and Crashes

50 Pages Posted: 17 Sep 2010 Last revised: 17 Jul 2019

See all articles by Haim Kedar-Levy

Haim Kedar-Levy

Ben Gurion University of the Negev - Guilford Glazer Faculty of Business and Management

Date Written: April 22, 2019

Abstract

A discrete-time dynamic asset-pricing model specifies the economic rationale for a rich array of price dynamics. Two boundedly-rational investors with different risk preferences trade periodically, where excess supply is cleared by a tâtonnement. Cast at the core of asset-pricing modelling, this structure allows us to explore price discovery intra-periodically, and over time. If dividends are observable the price converges to Merton’s ICAPM, but if investors rely on past realizations, momentum and reversal patterns emerge, which might escalate to bubbles and crashes. The model features increasing volume but declining liquidity during positive bubbles, and lowest liquidity after negative bubbles.

Keywords: Price Discovery; Bubble; Crash; Momentum; Reversal

JEL Classification: C62, D53, D84, G01, G11

Suggested Citation

Kedar-Levy, Haim, Price Discovery in the Small and in the Large: Momentum and Reversal, Bubbles and Crashes (April 22, 2019). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1678421 or http://dx.doi.org/10.2139/ssrn.1678421

Haim Kedar-Levy (Contact Author)

Ben Gurion University of the Negev - Guilford Glazer Faculty of Business and Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
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