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The speed of stock price discovery

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  • Gavious, Arieh
  • Kedar-Levy, Haim

Abstract

We develop closed-form expressions for the path and speed of stock price discovery in a utility-based CAPM with wealth effects. Two investors with uniquely bounded risk-preferences always apply opposite portfolio rebalancing trades. These trades determine the intra-period path and speed of price discovery in a Walrasian, tâtonnement setup. While conditions for maximum speed exist, convergence is rapid over a wide range of endowments and preferences. Convergence to equilibrium is exponential, and its speed depends on endowments, risk-preferences, firm size, and market price for risk. Convergence is not guaranteed, and the conditions for divergence are specified.

Suggested Citation

  • Gavious, Arieh & Kedar-Levy, Haim, 2013. "The speed of stock price discovery," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 245-258.
    • Handle: RePEc:eee:jfinin:v:22:y:2013:i:2:p:245-258
    DOI: 10.1016/j.jfi.2012.09.003
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    Cited by:

    1. Hauser, Shmuel & Kedar-Levy, Haim & Milo, Orit, 2022. "Price discovery during parallel stocks and options preopening: Information distortion and hints of manipulation," Journal of Financial Markets, Elsevier, vol. 59(PA).
    2. Immonen, Eero, 2015. "A quantitative description for efficient financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 433(C), pages 171-181.
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    4. Immonen, Eero, 2017. "Simple agent-based dynamical system models for efficient financial markets: Theory and examples," Journal of Mathematical Economics, Elsevier, vol. 69(C), pages 38-53.
    5. Kedar-Levy, Haim, 2020. "Price discovery in the small and in the large: Momentum and reversal, bubbles, and crashes," Journal of Financial Markets, Elsevier, vol. 48(C).

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