I model the dynamics of price adjustments to news arrival in limit order markets when investors have limited attention. Because of limited attention, investors monitor news arrival imperfectly. Consequently prices reflect news with delay. This delay shrinks when investors' attention capacity increases. The adjustment delay also decreases when the frequency of news arrival increases. When news arrival frequency is higher, the picking-off risk increases for limit orders. The order book becomes thinner and there are fewer stale limit orders to execute or cancel following news arrival. Hence, it reduces the time it takes for market prices to reflect news content.
Classification JEL : G14, D82, D83
Keywords : imperfect attention, news, limit order book, price formation, market liquidity
Updated on: 06/12/2018 11:10