Zeros

Research output: Contribution to journalArticlepeer-review

Abstract

Asset prices can be stale. We define price “staleness” as lack of price adjustments yielding zero returns (i.e., zeros). The term “idleness” (resp. “near idleness”) is, instead, used to define staleness when trading activity is absent (resp. close to absent). Using statistical and pricing metrics, we show that zeros are a genuine economic phenomenon linked to the dynamics of trading volume and, therefore, liquidity. Zeros are, in general, not the result of institutional features, like price discreteness. In essence, spells of idleness or near idleness are stylized facts suggestive of a key, omitted market friction in the modeling of asset prices. We illustrate how accounting for this friction may generate sizable risk compensations in short-dated option returns.

Bibliographical metadata

Original languageEnglish
Pages (from-to)3466-3479
Number of pages14
JournalMANAGEMENT SCIENCE
Volume66
Issue number8
DOIs
Publication statusPublished - 8 May 2020

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