Dynamic Equilibrium and Volatility in Financial Asset Markets

Yacine Ait-Sahalia

No 5479, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops and estimates a continuous-time model of a financial market where investors' trading strategies and the specialist's rule of price adjustments are the best response to each other. We examine how far modeling market microstructure in a purely rational framework can go in explaining alleged asset pricing `anomalies.' The model produces some major findings of the empirical literature: excess volatility of the market price compared to the asset's fundamental value, serially correlated volatility, contemporaneous volume-volatility correlation, and excess kurtosis of price changes. We implement a nonlinear filter to estimate the unobservable fundamental value, and avoid the discretization bias by computing the exact conditional moments of the price and volume processes over time intervals of any length.

JEL-codes: C13 C22 (search for similar items in EconPapers)
Date: 1996-03
Note: AP
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Published as Journal of Econometrics, Vol. 84 (1998): 93-127.

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Journal Article: Dynamic equilibrium and volatility in financial asset markets (1998)
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