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Dynamic Asset Allocation and the Informational Efficiency of Markets

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  • Grossman, Sanford J
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    Abstract

    Markets have an allocational role; even in the absence of news about payoffs, prices change to facilitate trade and allocate resources to their best use. Allocational price changes create noise in the signal extraction process, and markets where such trading is important are markets in which we may expect to find a failure of informational efficiency. An important source of allocational trading is the use of dynamic trading strategies caused by the incomplete equitization of risks. Incomplete equitization causes trade. Trade implies the inefficiency of passive strategies, thus requiring investors to determine whether price changes are informational or allocational. Copyright 1995 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 50 (1995)
    Issue (Month): 3 (July)
    Pages: 773-87

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    Handle: RePEc:bla:jfinan:v:50:y:1995:i:3:p:773-87

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    Cited by:
    1. Nilsson, Birger, 2002. "Financial Liberalization and the Changing Characteristics of Nordic Stock Returns," Working Papers 2002:4, Lund University, Department of Economics.
    2. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, Elsevier, vol. 111(1), pages 181-199.
    3. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
    4. Thomas H. Noe & Stephen D. Smith, 1997. "The buck stops where? The role of limited liability in economics," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 46-56.
    5. William O. Brown, Jr., . "Inside Information and Public News: R-Squared and Beyond," Claremont Colleges Working Papers 1999-26, Claremont Colleges.
    6. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347 National Bureau of Economic Research, Inc.
    7. Matti Suominen & Petri Jylhä, 2009. "Arbitrage Capital and Currency Carry Trade Returns," 2009 Meeting Papers, Society for Economic Dynamics 84, Society for Economic Dynamics.
    8. Jylhä, Petri & Suominen, Matti, 2011. "Speculative capital and currency carry trades," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(1), pages 60-75, January.
    9. Madura, Jeff & Bers, Martina K., 2002. "The performance persistence of foreign closed-end funds," Review of Financial Economics, Elsevier, Elsevier, vol. 11(4), pages 263-285.
    10. Owen A. Lamont, 2002. "Evaluating Value Weighting: Corporate Events and Market Timing," NBER Working Papers 9049, National Bureau of Economic Research, Inc.
    11. Willem H. Buiter, 2000. "Optimal currency areas: why does the exchange rate regime matter? (with an application to UK membership in EMU)," LSE Research Online Documents on Economics 20178, London School of Economics and Political Science, LSE Library.
    12. Gao, Pingyang, 2007. "Keynesian Beauty Contest, Accounting Disclosure, and Market Efficiency," MPRA Paper 9480, University Library of Munich, Germany, revised Oct 2007.
    13. Buiter, Willem H, 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers.
    14. Alan D. Morrison, 2004. "Competition and Information Production in Market Maker Models," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7-8), pages 1171-1190.

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