Asset Price Dynamics with Limited Attention

Terrence Hendershott, Albert Menkveld, Rémy Praz and Mark Seasholes

The Review of Financial Studies, 2022, vol. 35, issue 2, 962-1008

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.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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