Price discovery in the small and in the large: Momentum and reversal, bubbles, and crashes

Haim Kedar-Levy

Journal of Financial Markets, 2020, vol. 48, issue C

Abstract: Using a discrete-time asset-pricing model, I specify the economic rationale for a rich array of price dynamics. Two boundedly-rational investors with different risk preferences trade periodically, where excess supply is cleared by a tâtonnement process. Cast at the core of asset-pricing modeling, this structure allows me to explore price discovery intra-periodically, and over time. If dividends are observable, the price converges to Merton's ICAPM, but if investors rely on past realizations, momentum and reversal patterns emerge, which might escalate to bubbles and crashes. The model features increasing volume but declining liquidity during positive bubbles, and lowest liquidity after negative bubbles.

Keywords: Price discovery; Bubble; Crash; Momentum; Reversal (search for similar items in EconPapers)
JEL-codes: C62 D53 D84 G01 G11 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:48:y:2020:i:c:s1386418118302428

DOI: 10.1016/j.finmar.2019.08.001

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