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Short-term Investment and the Informational Efficiency of the Market

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Author Info
Xavier Vives

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Abstract

A dynamic market for a risky asset with a continuum of risk averse heterogeneously informed investors and a risk neutral competitive market sector is examined. The market is (semi-strong) informationally efficient due to competitive market making activity. The paper analyzes the effect of investors' horizons on the information content of prices (precision in the estimation of the fundamental value of the risky asset). It is shown that short horizons enhance or reduce price informativeness depending on the temporal pattern of private information arrival. With concentrated arrival of information short horizons reduce price informativeness, with diffuse arrival of information short horizons enhance price informativeness.

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Publisher Info
Paper provided by European Science Foundation Network in Financial Markets, c/o C.E.P.R, 53--56 Great Sutton Street, London EC1V 0DG in its series CEPR Financial Markets Paper with number 0034.

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Date of creation: Jan 1994
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Availability: in print
Handle: RePEc:cpr:ceprfm:0034

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Related research
Keywords: Short Horizon; Informational Arrival Risk Aversion; Market Efficiency; Competitive Market Making; Rational Expectations;

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  1. Giovanni Cespa, 2001. "A Comparison of Stock Market Mechanisms," Economics Working Papers 545, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2003. [Downloadable!]
    Other versions:
  2. Craig Holden & Avanidhar Subrahmanyam, 1998. "New Events, Information Acquisition, and Serial Correlation," University of California at Los Angeles, Anderson Graduate School of Management 1115, Anderson Graduate School of Management, UCLA. [Downloadable!]
  3. Alexander Gümbel, 2000. "Myopic Traders, Efficiency and Taxation," OFRC Working Papers Series 2000fe05, Oxford Financial Research Centre. [Downloadable!]
  4. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June. [Downloadable!]
    Other versions:
  5. Cespa, Giovanni & Vives, Xavier, 2007. "Dynamic trading and asset prices: Keynes vs. Hayek," IESE Research Papers D/716, IESE Business School. [Downloadable!]
    Other versions:
  6. Riccardo Calcagno & Florian Heider, 2007. "Market based compensation, price informativeness and short-term trading," Working Paper Series 735, European Central Bank. [Downloadable!]
  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. [Downloadable!]
  8. Säfvenblad, Patrik, 1997. "Lead-Lag Effects When Prices Reveal Cross-Security Information," Working Paper Series in Economics and Finance 189, Stockholm School of Economics. [Downloadable!]
  9. Sandro Brusco & Carolina Manzano & Mikel Tapia, 2003. "Price Discovery In The Pre-Opening Period. Theory And Evidence From The Madrid Stock Exchange," Business Economics Working Papers wb035814, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  10. Christophe Chamley, 2005. "Complementarities in Information Acquisition with Short-Term Trades," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-156, Boston University - Department of Economics. [Downloadable!]
  11. Giovanni Cespa, 2000. "Short-term Investment and Equilibrium Multiplicity," Economics Working Papers 520, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2002. [Downloadable!]
    Other versions:
  12. Alexander Gumbel, 1999. "Trading on Short-Term Information," OFRC Working Papers Series 1999fe10, Oxford Financial Research Centre. [Downloadable!]
  13. Riccardo Calcagno & Florian Heider, 2004. "Market Based Compensation, Trading And Liquidity," Business Economics Working Papers wb046224, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  14. Marc-Andreas Muendler, 2005. "Risk Neutral Investors Do Not Acquire Information¤," University of California at San Diego, Economics Working Paper Series 2005-10, Department of Economics, UC San Diego. [Downloadable!]
  15. Giovanni Cespa, 2003. "Giffen Goods and Market Making," CSEF Working Papers 97, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
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