1. Motivation Evolutionarily Slow. In modern financial markets, people simultaneously trade the exact same assets on vastly different timescales. For example, a Jegadeesh and Titman (1993)-style momentum portfolio turns over half its holdings once … [Continue reading]
1. Motivation In spite of how they are modeled in Merton (1971), traders don't pay attention to their portfolio every second of every day. What's more, this lumpy rebalancing behavior has important asset-pricing implications. If traders aren't … [Continue reading]
1. Motivation Kyle (1985) introduces an information-based asset-pricing model where informed traders keep trading until the marginal benefit of holding one additional share of the asset is exactly offset by the marginal cost of this last trade's … [Continue reading]
1. Motivation New information-based asset-pricing models are often extensions of either Kyle (1985) or Grossman-Stiglitz (1980). At first glance, these two canonical models look quite similar. Both price an asset with an unknown payout, like a stock … [Continue reading]
1. Motivation A stock's idiosyncratic-return volatility is the root-mean-squared error, $\mathit{ivol}_{n,t} = \sqrt{ \sfrac{1}{D_t} \cdot \sum_{d_t=1}^{D_t} \varepsilon_{n,d_t}^2}$, from the daily regression \begin{align} r_{n,d_t} = \alpha + … [Continue reading]