Price discovery and Volatility.A Theoretical Approach

Edson Kambeu, Olipha Mpofu, Drayton Muchochoma


In this paper we analyse and show how price discovery process influence the volatility of stocks. Using a theoretical approach, our initial analysis revealed that stocks experience ‘normal’ volatility as the price move from one equilibrium price to another as part of the price discovery process. Our further analysis revealed that, due to the inefficiency of financial markets, stocks also experience transitionary volatility which occurs when the price transition from one equilibrium price to another. The implication of these analytical findings means that the price discovery volatility effects can only be reduced by improving the efficiency of financial markets. Thus, we recommended that the financial microstructure be designed in a manner that promotes the efficiency of financial markets.      



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International Journal Finance and Banking Studies (2147-4486) by Hasan Dinçer is licensed under aCreative Commons Attribution-NonCommercial 4.0 International License.
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