TY  - JOUR
AU  - Ait-Sahalia,Yacine
TI  - Dynamic Equilibrium and Volatility in Financial Asset Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5479
PY  - 1996
Y2  - March 1996
UR  - http://www.nber.org/papers/w5479
L1  - http://www.nber.org/papers/w5479.pdf
N1  - Author contact info:
Yacine Ait-Sahalia
Department of Economics
Fisher Hall
Princeton University
Princeton, NJ 08544-1021
Tel: 609/258-4015
Fax: 609/258-0719
E-Mail: yacine@princeton.edu
AB  - 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.
ER  -