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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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  • Cespa, Giovanni, 2002. "Short-term investment and equilibrium multiplicity," European Economic Review, Elsevier, vol. 46(9), pages 1645-1670, October.
    • Handle: RePEc:eee:eecrev:v:46:y:2002:i:9:p:1645-1670
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    Cited by:

    1. Chen, Binbin & Liu, Shancun & (John) Liu, Zhiyong, 2021. "The more myopic, the more chaos? How the degree of traders’ short-termism affects the financial market equilibrium," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 596-608.
    2. Barbosa, António, 2019. "The Role of Information in the Discrepancy Between Average Prices and Expectations," MPRA Paper 97416, University Library of Munich, Germany.
    3. Giovanni Cespa, 2004. "A Comparison of Stock Market Mechanisms," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 803-824, Winter.
    4. Farhi, Emmanuel & Tirole, Jean, 2015. "Liquid bundles," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 634-655.
    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, April.
    6. Xavier Vives & Giovanni Cespa, 2011. "Higher Order Expectations, Illiquidity, and Short Term Trading," 2011 Meeting Papers 929, Society for Economic Dynamics.
    7. Trustmore Bekapi, 2023. "Impact of Institutional Investors and Board Independence on Corporate Short-Termism: Longitudinal Evidence from Zimbabwe," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(9), pages 1531-1552, September.
    8. Giovanni Cespa & Xavier Vives, 2012. "Dynamic Trading and Asset Prices: Keynes vs. Hayek," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 539-580.
    9. Vives, Xavier & Cespa, Giovanni, 2011. "Expectations, Liquidity, and Short-term Trading," CEPR Discussion Papers 8303, C.E.P.R. Discussion Papers.
    10. Giovanni Cespa, 2005. "Giffen goods and market making," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(4), pages 983-997, June.
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    12. Giovanni Cespa, 2008. "Information Sales and Insider Trading with Long‐Lived Information," Journal of Finance, American Finance Association, vol. 63(2), pages 639-672, April.

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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