1. Motivation Imagine you're an arbitrageur and you see a sequence of abnormal returns: \begin{align} \mathit{ra}_t \overset{\scriptscriptstyle \mathrm{iid}}{\sim} \begin{cases} +1 &\text{w/ prob } \sfrac{1}{2} \cdot (1 + \alpha) \\ -1 … [Continue reading]

# Why Not Fourier Methods?

1. Motivation There are many ways that you might measure the typical horizon of a stock's demand shocks. For instance, Fourier methods might at first appear to be a promising approach, but first impressions can be deceiving. Here's why: spikes in … [Continue reading]

# A Model of Hard-to-Diagnose Mispricings

1. Introduction Important market events often have a variety of interpretations. For example, a recent Financial Times article outlined several different readings Facebook's "feeble showing... in the weeks since its $\mathdollar 16{\scriptstyle … [Continue reading]

# Hong, Stein, and Yu (2007)

1. Motivation It's absolutely essential that people ignore most contingencies when making predictions in everyday life. Dennett (1984) makes this point quite colorfully by asking: "How is it that I can get myself a midnight snack? I suspect there … [Continue reading]

# Two Period Kyle (1985) Model

1. Motivation This post shows how to solve for the equilibrium price impact and demand coefficients in a $2$ period Kyle (1985)-type model where informed traders see a noisy signal about the fundamental value of a single asset. There are various … [Continue reading]