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Private Information and Trade Timing

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  • Lones Smith

Abstract

This paper investigates the Bayesian decision-theoretic foundations of the Wall Street adage that `timing is everything'. One might think that a `small' risk-neutral trader wishes to act immediately upon any private information he possesses. I begin with a counterintuitive nding that trade timing doesn't matter for an Arrow security, as one's expected return per dollar invested is a martingale. This timing irrelevance discovery motivates an analysis of general compound securities. While timing there is ambiguous, I nd that natural monotone likelihood ratio assumptions on both private and public information restore the intuition that one should trade with all due dispatch.
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Suggested Citation

  • Lones Smith, 2000. "Private Information and Trade Timing," American Economic Review, American Economic Association, vol. 90(4), pages 1012-1018, September.
  • Handle: RePEc:aea:aecrev:v:90:y:2000:i:4:p:1012-1018 Note: DOI: 10.1257/aer.90.4.1012
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    References listed on IDEAS

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    1. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
    2. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    3. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-168, February.
    4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    5. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    6. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
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    Citations

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    Cited by:

    1. Katya Malinova & Andreas Park, 2009. "Intraday Trading Patterns: The Role of Timing," Working Papers tecipa-365, University of Toronto, Department of Economics.
    2. Andreas Park & Daniel Sgroi, 2008. "Herding and Contrarianism in a Financial Trading Experiment with Endogenous Timing," Working Papers tecipa-341, University of Toronto, Department of Economics.
    3. Andreas Park, 2008. "Bid-Ask Spreads and Volume:The Role of Trade Timing," Working Papers tecipa-309, University of Toronto, Department of Economics.
    4. Park, Andreas & Sgroi, Daniel, 2012. "Herding, contrarianism and delay in financial market trading," European Economic Review, Elsevier, vol. 56(6), pages 1020-1037.
    5. Malinova, Katya & Park, Andreas, 2014. "The impact of competition and information on intraday trading," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 55-71.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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