Easley is from the Department of Economics and O'Hara is from the Johnson Graduate School of Management, both at Cornell University. We would like to thank Doug Diamond, Joel Hasbrouck, Eric Hughson, Murugappa Krishnan, Andy Lo, and seminar participants at Boston College, Cornell, and the Wharton School for helpful comments. We would also like to acknowledge the extremely helpful comments on an anonymous referee. An earlier version of this paper was presented at the Western Finance Association Meetings, June 1990.
Time and the Process of Security Price Adjustment
Article first published online: 30 APR 2012
1992 The American Finance Association
The Journal of Finance
Volume 47, Issue 2, pages 577–605, June 1992
How to Cite
EASLEY, D. and O'HARA, M. (1992), Time and the Process of Security Price Adjustment. The Journal of Finance, 47: 577–605. doi: 10.1111/j.1540-6261.1992.tb04402.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper delineates the link between the existence of information, the timing of trades, and the stochastic process of prices. We show that time affects prices, with the time between trades affecting spreads. Because the absence of trades is correlated with volume, our model predicts a testable relation between spreads and normal and unexpected volume, and demonstrates how volume affects the speed of price adjustment. Our model also demonstrates how the transaction price series will be a biased representation of the true price process, with the variance being both overstated and heteroskedastic.