The speed of stock price discovery

Arieh Gavious, Haim Kedar-Levy

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

We develop closed-form expressions for the path and speed of stock price discovery in a utility-based CAPM with wealth effects. Two investors with uniquely bounded risk-preferences always apply opposite portfolio rebalancing trades. These trades determine the intra-period path and speed of price discovery in a Walrasian, tâtonnement setup. While conditions for maximum speed exist, convergence is rapid over a wide range of endowments and preferences. Convergence to equilibrium is exponential, and its speed depends on endowments, risk-preferences, firm size, and market price for risk. Convergence is not guaranteed, and the conditions for divergence are specified.

Original languageEnglish
Pages (from-to)245-258
Number of pages14
JournalJournal of Financial Intermediation
Volume22
Issue number2
DOIs
StatePublished - 1 Jan 2013

Keywords

  • Asset pricing
  • Microstructure
  • Price discovery
  • Speed
  • Wealth effects

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