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Short-term investment and equilibrium multiplicity

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  • Giovanni Cespa

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

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 520.

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Date of creation: Jun 2000
Date of revision: Jun 2002
Handle: RePEc:upf:upfgen:520

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Web page: http://www.econ.upf.edu/

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Keywords: Financial economics; information and market efficiency;

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  1. Holden, Craig W & Subrahmanyam, Avanidhar, 1996. "Risk Aversion, Liquidity, and Endogenous Short Horizons," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 691-722.
  2. Subrahmanyam, Avanidhar, 1991. "Risk Aversion, Market Liquidity, and Price Efficiency," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 416-41.
  3. Admati, Anat R, 1985. "A Noisy Rational Expectations Equilibrium for Multi-asset Securities Markets," Econometrica, Econometric Society, Econometric Society, vol. 53(3), pages 629-57, May.
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  6. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors And Equity Prices," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(1), pages 229-259, February.
  7. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers, University of California at Berkeley RPF-192, University of California at Berkeley.
  8. Tiroley, Jean, 2000. "Corporate Governance," CEI Working Paper Series, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University 2000-1, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  9. Wang, Jiang, 1959- & He, Hua., 1994. "Differential information and dynamic behavior of stock trading volume," Working papers 3731-94., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  10. Pagano, Marco, 1989. "Endogenous Market Thinness and Stock Price Volatility," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 56(2), pages 269-87, April.
  11. Rohit Rahi & James Dow, 1998. "Should Speculators be Taxed?," FMG Discussion Papers, Financial Markets Group dp291, Financial Markets Group.
  12. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
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  14. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1315-35, November.
  15. Vives, X., 1993. "Short-Term Investment and the Informational Efficiency of the Market," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 207.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  16. Danthine, Jean-Pierre & Moresi, Serge, 1993. "Volatility, information and noise trading," European Economic Review, Elsevier, vol. 37(5), pages 961-982, June.
  17. Admati, Anat R & Pfleiderer, Paul, 1991. "Sunshine Trading and Financial Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 443-81.
  18. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 54(2), pages 581-622, 04.
  19. Foster, F Douglas & Viswanathan, S, 1990. "A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 593-624.
  20. Benjamin M. Friedman, 1995. "Economic Implications of Changing Share Ownership," NBER Working Papers 5141, National Bureau of Economic Research, Inc.
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Cited by:
  1. Giovanni Cespa, 2003. "Giffen Goods and Market Making," Working Papers 68, Barcelona Graduate School of Economics.
  2. Giovanni Cespa & Xavier Vives, 2012. "Dynamic Trading and Asset Prices: Keynes vs. Hayek," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 539-580.
  3. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long-Lived Information," Journal of Finance, American Finance Association, American Finance Association, vol. 63(2), pages 639-672, 04.
  4. Giovanni Cespa, 2002. "Giffen goods and market making," Economics Working Papers 681, Department of Economics and Business, Universitat Pompeu Fabra, revised May 2003.
  5. 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.
  6. Giovanni Cespa & Xavier Vives, 2011. "Higher Order Expectations, Illiquidity, and Short-term Trading," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 276, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  7. Cespa, Giovanni & Vives, Xavier, 2011. "Expectations, Liquidity, and Short-term Trading," CEPR Discussion Papers 8303, C.E.P.R. Discussion Papers.
  8. Giovanni Cespa, 2003. "A comparison of stock market mechanisms," Working Papers 50, Barcelona Graduate School of Economics.
  9. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 174, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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