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Information and trading targets in a dynamic market equilibrium

Author

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  • Choi, Jin Hyuk
  • Larsen, Kasper
  • Seppi, Duane J.

Abstract

This paper describes equilibrium interactions between dynamic portfolio rebalancing given a private end-of-day trading target and dynamic trading on long-lived private information. Order-splitting for portfolio rebalancing injects multifaceted dynamics in the market. These include autocorrelated order flow, sunshine trading, endogenous learning, and short-term speculation. The model has testable implications for intraday patterns in volume, liquidity, price volatility, order-flow autocorrelation, differences between informed-investor and rebalancer trading strategies, and for how these patterns comove with trading-target volatility and other market conditions.

Suggested Citation

  • Choi, Jin Hyuk & Larsen, Kasper & Seppi, Duane J., 2019. "Information and trading targets in a dynamic market equilibrium," Journal of Financial Economics, Elsevier, vol. 132(3), pages 22-49.
    • Handle: RePEc:eee:jfinec:v:132:y:2019:i:3:p:22-49
    DOI: 10.1016/j.jfineco.2018.11.003
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Qiyu & Ding, Rong & Chen, Ding & Zhang, Xiaoxiang, 2023. "The effects of mandatory ESG disclosure on price discovery efficiency around the world," International Review of Financial Analysis, Elsevier, vol. 89(C).
    2. Péter Kondor & Gábor Pintér, 2022. "Clients' Connections: Measuring the Role of Private Information in Decentralized Markets," Journal of Finance, American Finance Association, vol. 77(1), pages 505-544, February.
    3. Brøgger, Søren Bundgaard, 2021. "The market impact of predictable flows: Evidence from leveraged VIX products," Journal of Banking & Finance, Elsevier, vol. 133(C).
    4. Lin, Zhongguo & Hamill, Philip A. & Li, Youwei & Sun, Zhuowei & Waterworth, James, 2020. "How did order-flow impact bond prices during the European Sovereign Debt Crisis?," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 13-24.
    5. Xiao Chen & Jin Hyuk Choi & Kasper Larsen & Duane J. Seppi, 2022. "Learning about latent dynamic trading demand $$^*$$ ∗," Mathematics and Financial Economics, Springer, volume 16, number 1, June.
    6. Huang, Shao’an & Qiu, Zhigang & Wang, Gaowang & Wang, Xiaodan, 2022. "Government intervention through informed trading in financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    7. Jin Hyuk Choi & Heeyoung Kwon & Kasper Larsen, 2022. "Trading constraints in continuous-time Kyle models," Papers 2206.08117, arXiv.org.
    8. Ibrahim Ekren & Brad Mostowski & Gordan v{Z}itkovi'c, 2022. "Kyle's Model with Stochastic Liquidity," Papers 2204.11069, arXiv.org.
    9. Jin Hyuk Choi & Tae Ung Gang, 2021. "Optimal investment in illiquid market with search frictions and transaction costs," Papers 2101.09936, arXiv.org, revised Aug 2021.
    10. Xiao Chen & Jin Hyuk Choi & Kasper Larsen & Duane J. Seppi, 2021. "Learning about latent dynamic trading demand," Papers 2105.13401, arXiv.org, revised Aug 2021.
    11. Pham, Manh Cuong & Anderson, Heather Margot & Duong, Huu Nhan & Lajbcygier, Paul, 2020. "The effects of trade size and market depth on immediate price impact in a limit order book market," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    Order-splitting; Parent and child orders; Optimal order execution; Portfolio rebalancing; Market microstructure;
    All these keywords.

    JEL classification:

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

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