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Short-term investment and equilibrium multiplicity

  • Giovanni Cespa

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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File URL: http://www.econ.upf.edu/docs/papers/downloads/520.pdf
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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
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Xavier Vives, 1994. "Short-term Investment and the Informational Efficiency of the Market," CEPR Financial Markets Paper 0034, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
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  13. Gerard Gennotte and Hayne Leland., 1989. "Market Liquidity, Hedging and Crashes," Research Program in Finance Working Papers RPF-184, University of California at Berkeley.
  14. Paul A. Gompers & Andrew Metrick, . "Institutional Investors and Equity Prices," Rodney L. White Center for Financial Research Working Papers 20-99, Wharton School Rodney L. White Center for Financial Research.
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  16. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, vol. 69(1), pages 1-35, January.
  17. Rohit Rahi & James Dow, 1998. "Informed Trading, Investment, and Welfare," FMG Discussion Papers dp292, Financial Markets Group.
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  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. Subrahmanyam, Avanidhar, 1991. "Risk Aversion, Market Liquidity, and Price Efficiency," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 416-41.
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