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Price Discovery and Volatility: A theoretical Approach

Author

Listed:
  • Edson Kambeu
  • Olipha Mpofu
  • Drayton Muchochoma

Abstract

In this paper we analyse and show how price discovery process influence the volatility of stocks. Using a theoretical approach, our initial analysis revealed that stocks experience ‘normal’ volatility as the price move from one equilibrium price to another as part of the price discovery process. Our further analysis revealed that, due to the inefficiency of financial markets, stocks also experience transitionary volatility which occurs when the price transition from one equilibrium price to another. The implication of these analytical findings means that the price discovery volatility effects can only be reduced by improving the efficiency of financial markets. Thus, we recommended that the financial microstructure be designed in a manner that promotes the efficiency of financial markets.

Suggested Citation

  • Edson Kambeu & Olipha Mpofu & Drayton Muchochoma, 2017. "Price Discovery and Volatility: A theoretical Approach," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 6(2), pages 37-43, March.
    • Handle: RePEc:rbs:ijfbss:v:6:y:2017:i:2:id:30
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    References listed on IDEAS

    as
    1. Serge Darolles & Christian Gouriéroux & Gaëlle Le Fol, 2000. "Intraday Transaction Price Dynamics," Annals of Economics and Statistics, GENES, issue 60, pages 207-238.
    2. repec:adr:anecst:y:2000:i:60:p:09 is not listed on IDEAS
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