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]

# Risk Aversion, Information Choice, and Price Impact

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]

# Comparing Kyle and Grossman-Stiglitz

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 … [Continue reading]

# Comparing “Explanations” for the iVol Puzzle

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]

# Impulse-Response Functions for VARs

1. Motivating Example If you regress the current quarter's inflation rate, $x_t$, on the previous quarter's rate using data from FRED over the period from Q3-1987 to Q4-2014, then you get the AR(1) point estimate, \begin{align} x_t = … [Continue reading]