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Trade Timing, Price Volatility and Serial Correlation

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  • Ming†Chang Wang
  • Lon†Ping Zu

Abstract

This study sets up a multiple†period, competitive rational expectations model to facilitate an examination into how informed traders time their trading on private information so as to maximise their expected utility. We find that, in equilibrium, informed traders may elect to trade late on their information, a result which contradicts other competitive rational expectations models in which it is generally assumed that informed traders will trade immediately upon receiving private information. Our results imply that price volatility will increase and price changes may display positive serial correlation. This phenomenon helps to explain the excess volatility puzzle of asset prices and medium†term continuations (momentum).

Suggested Citation

  • Ming†Chang Wang & Lon†Ping Zu, 2013. "Trade Timing, Price Volatility and Serial Correlation," European Financial Management, European Financial Management Association, vol. 19(5), pages 911-934, November.
    • Handle: RePEc:bla:eufman:v:19:y:2013:i:5:p:911-934
    DOI: 10.1111/j.1468-036X.2011.00614.x
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    References listed on IDEAS

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