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dc.contributor.authorSteiner, Jakuben_US
dc.contributor.authorStewart, Colinen_US
dc.date.accessioned2012-06-28en_US
dc.date.accessioned2012-07-12T12:34:04Z-
dc.date.available2012-07-12T12:34:04Z-
dc.date.issued2012en_US
dc.identifier.urihttp://hdl.handle.net/10419/59665-
dc.description.abstractWe study the effect of frequent trading opportunities and categorization on pricing of a risky asset. Frequent opportunities to trade lead to large distortions in prices if some agents forecast future prices using a simplified model of the world that fails to distinguish between some states. In the limit as the period length vanishes, these distortions take a particular form: the price must be the same in any two states that a positive mass of agents categorize together. Price distortions therefore tend to be large when different agents categorize states in different ways. We characterize the limiting prices in terms of rational expectations prices associated with a coarsened process. Similar results hold if, instead of using a simplified model of the world, some agents overestimate the likelihood of small probability events, as in prospect theory.en_US
dc.language.isoengen_US
dc.publisherNorthwestern Univ., Kellogg Graduate School of Management, Center for Mathematical Studies in Economics and Management Science Evanstonen_US
dc.relation.ispartofseriesDiscussion Paper, Center for Mathematical Studies in Economics and Management Science 1549en_US
dc.subject.ddc330en_US
dc.titlePrice distortions in high-frequency marketsen_US
dc.typeWorking Paperen_US
dc.identifier.ppn718479033en_US
dc.rightshttp://www.econstor.eu/dspace/Nutzungsbedingungenen_US
Appears in Collections:Discussion Papers, Kellogg School of Management, Northwestern University

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