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Asset Price Dynamics with Limited Attention

Author

Listed:
  • Terrence Hendershott
  • Albert J Menkveld
  • Rémy Praz
  • Mark Seasholes

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.

Suggested Citation

  • Terrence Hendershott & Albert J Menkveld & Rémy Praz & Mark Seasholes, 2022. "Asset Price Dynamics with Limited Attention," The Review of Financial Studies, Society for Financial Studies, vol. 35(2), pages 962-1008.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:2:p:962-1008.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab045
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    Cited by:

    1. José Miguel Cardoso da Costa & Rui Albuquerque, 2023. "Price elasticity of demand and risk-bearing capacity in sovereign bond auctions," Working Papers w202302, Banco de Portugal, Economics and Research Department.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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