Review of Financial Studies Vol. 35 No. 2 2022

Asset Price Dynamics with Limited Attention

Terrence Hendershott¹; Albert J. Menkveld²; Rémy Praz³; Mark Seasholes⁴

¹ University of California at Berkeley · ² Vrije Universiteit Amsterdam · ³ Danske Bank · ⁴ Arizona State University

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.

DOI

10.1093/rfs/hhab045

Volume

35

Issue

2

Pages

962-1008

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓