The dynamic process of price discovery in an equity market

Robert Schwartz, Avner Wolf, Jacob Paroush

Research output: Contribution to journalArticlepeer-review

7 Scopus citations


Purpose – Empirical researchers should recognize that opening and closing prices are not simple reflections of underlying fundamental values, as studies of stock price behavior have documented a U-shaped intra-day volatility pattern that is a manifestation of noise. While implicit transaction costs and the tactical trading of informed participants are contributing factors, they do not provide a sufficient explanation. The purpose of this paper is to focus on an additional factor – price discovery and present a formulation which allows investors with divergent expectations to respond rationally to each other's valuations, and which implies elevated volatility even when information is common knowledge. Design/methodology/approach – This is a conceptual paper with empirical implications for the dynamic process of price formation in an equity market. The work is motivated by the well-documented finding that intra-day stock prices are excessively volatile, especially at market openings and closings. The paper's theoretical construct shows that the volality accentuation can be attributed to the dynamic process of price discovery. Findings – The paper's chief finding is that price discovery is a protracted, path-dependent process in an environment characterized by divergent expectations and adaptive valuations. The protracted, path-dependent process of price discovery can account for the observed elevation of intra-day price volatility. Originality/value – This is an original research paper. The formulation is a novel and innovative treatement of a divergent expectations, adaptive valuations paradigm.

Original languageEnglish
Pages (from-to)554-565
Number of pages12
JournalManagerial Finance
Issue number7
StatePublished - 15 Jun 2010

Bibliographical note

Publisher Copyright:
© 2010, © Emerald Group Publishing Limited.


  • Equity capital
  • Financial Markets
  • Investments
  • Stock prices


Dive into the research topics of 'The dynamic process of price discovery in an equity market'. Together they form a unique fingerprint.

Cite this