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Trading on Short-Term Information

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Author Info
Alexander Gümbel

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Abstract

This paper shows that investors may want fund managers to acquire and trade on short-term instead of more profitable long-term information. This improves learning about managerial ability from performance observations, for two reasons. Firstly, short-term information is of higher quality, which allows the investor to draw sharper inferences over a manager's type. Secondly, performance observations under long-term informed trade are contaminated by noise contained in prices, which further weakens inference. The paper thus explicitly links the degree of short-term information dissemination to the profitability and the learning implications of short-term versus long-term informed trading.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 161 (2005)
Issue (Month): 3 (September)
Pages: 428-
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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200509)161:3_428:tosi_2.0.tx_2-p

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Vives, Xavier, 1995. "Short-Term Investment and the Informational Efficiency of the Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(1), pages 125-60. [Downloadable!] (restricted)
    Other versions:
  2. Dow, James & Gorton, Gary, 1997. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1024-50, October.
    Other versions:
  3. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March. [Downloadable!] (restricted)
    Other versions:
  4. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," NBER Working Papers 3250, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Shleifer, Andrei & Vishny, Robert W, 1990. "Equilibrium Short Horizons of Investors and Firms," American Economic Review, American Economic Association, vol. 80(2), pages 148-53, May. [Downloadable!] (restricted)
  6. Khorana, Ajay, 1996. "Top management turnover An empirical investigation of mutual fund managers," Journal of Financial Economics, Elsevier, vol. 40(3), pages 403-427, March. [Downloadable!] (restricted)
  7. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June. [Downloadable!] (restricted)
  8. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns Of Mutual Fund Managers," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 389-432, May. [Downloadable!] (restricted)
    Other versions:
  9. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
    Other versions:
  10. Stein, Jeremy C, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 655-69, November. [Downloadable!] (restricted)
  11. Narayanan, M P, 1985. "Observability and the Payback Criterion," Journal of Business, University of Chicago Press, vol. 58(3), pages 309-23, July. [Downloadable!] (restricted)
  12. Holden, Craig W & Subrahmanyam, Avanidhar, 1996. "Risk Aversion, Liquidity, and Endogenous Short Horizons," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(2), pages 691-722. [Downloadable!] (restricted)
  13. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    Other versions:
  14. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  15. Benabou, Roland & Laroque, Guy, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 921-58, August. [Downloadable!] (restricted)
    Other versions:
  16. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 813-36, October. [Downloadable!] (restricted)
  17. Dow, James & Gorton, Gary, 1994. " Arbitrage Chains," Journal of Finance, American Finance Association, vol. 49(3), pages 819-49, July. [Downloadable!] (restricted)
    Other versions:
  18. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December. [Downloadable!] (restricted)
  19. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-98, December. [Downloadable!] (restricted)
  20. Heinkel, Robert & Stoughton, Neal M, 1994. "The Dynamics of Portfolio Management Contracts," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(2), pages 351-87. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Casamatta, Catherine & Pouget, Sébastien, 2009. "Fund Managers' Contracts and Short-Termism," IDEI Working Papers 553, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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