1. Motivation and Outline Asset pricing models tend to focus on a single stock that realizes a normally distributed value shock of undefined origins. e.g., think of Kyle (1985) as a representative example. This is a great starting point; however, … [Continue reading]
Scaling Up “Iffy” Decisions
1. Introduction Imagine you are an algorithmic trader, and you have to set up a trading platform. How many signals should you try to process? How many assets should you trade? If you are like most people, your answer will be something like: "As … [Continue reading]
Identifying Relevant Asset Pricing Time Scales
1. Introduction Take a look at the figure below which displays the price level and trading volume of the S&P 500 SPDR over trading year from July 2012 to July 2013. The solid black line in the top panel shows the price process for the ETF at a … [Continue reading]
Sacrificing Noise Traders
1. Introduction One way to look at the stock market is as an information aggregation technology. For instance, imagine that you are the CEO of a pencil making company, and have to decide whether or not to stick with making old-fashioned wood … [Continue reading]
Spontaneous Cognition Equilibrium
1. Motivation This note develops an information-based asset pricing model based on Tirole (2009) where thinking through market contingencies is costly and fear of missing an important detail restrains trading behavior. For example, think about a … [Continue reading]