Price Discovery and Volatility:A theoretical Approach

Edson Kambeu, Olipha Mpofu and Drayton Muchochoma
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Edson Kambeu: Business Management Department, BAISAGO University, Francistown, Botswana
Olipha Mpofu: Accounting and Finance Department, BAISAGO University, Francistown, Botswana
Drayton Muchochoma: Accounting and Finance Department, BAISAGO University, Francistown, Botswana

International Journal of Finance & Banking Studies, 2017, vol. 6, issue 2, 37-43

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. Ourfurther 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.

Keywords: Price discovery; volatility; stocks; financial markets (search for similar items in EconPapers)
Date: 2017
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