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Short-term investment and equilibrium multiplicity

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  • Cespa, Giovanni

Abstract

I study the effects of the heterogeneity of traders' horizon in the context of a 2-period NREE model where all traders are risk averse. Owing to inventory effects, myopic trading behavior generates multiplicity of equilibria. In particular, two distinct patterns arise. Along the first equilibrium, short term traders anticipate higher second period price reaction to information arrival and, owing to risk aversion, scale back their trading intensity. This, in turn, reduces both risk sharing and information impounding into prices enforcing a high returns' volatility-low price informativeness equilibrium. In the second one, the opposite happens and a low volatility-high price informativeness equilibrium arises.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 46 (2002)
Issue (Month): 9 (October)
Pages: 1645-1670

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Handle: RePEc:eee:eecrev:v:46:y:2002:i:9:p:1645-1670

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Cited by:
  1. Giovanni Cespa, 2003. "A comparison of stock market mechanisms," Working Papers 50, Barcelona Graduate School of Economics.
  2. Giovanni Cespa & Xavier Vives, 2009. "Dynamic Trading and Asset Prices: Keynes vs. Hayek," CESifo Working Paper Series 2839, CESifo Group Munich.
  3. Giovanni Cespa, 2002. "Giffen goods and market making," Economics Working Papers 681, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2003.
  4. Cespa, Giovanni & Vives, Xavier, 2011. "Higher order expectations, illiquidity, and short-term trading," IESE Research Papers D/915, IESE Business School.
  5. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long-Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, 04.
  6. Cespa, Giovanni & Vives, Xavier, 2011. "Expectations, Liquidity, and Short-term Trading," CEPR Discussion Papers 8303, C.E.P.R. Discussion Papers.
  7. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," CSEF Working Papers 174, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  8. Giovanni Cespa, 2003. "Giffen Goods and Market Making," Working Papers 68, Barcelona Graduate School of Economics.
  9. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," Working Papers 613, Queen Mary, University of London, School of Economics and Finance.

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