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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.

Suggested Citation

  • Giovanni Cespa, 2000. "Short-term investment and equilibrium multiplicity," Economics Working Papers 520, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2002.
  • Handle: RePEc:upf:upfgen:520
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," CSEF Working Papers 174, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Cespa, Giovanni & Vives, Xavier, 2011. "Expectations, Liquidity, and Short-term Trading," CEPR Discussion Papers 8303, C.E.P.R. Discussion Papers.
    4. 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.
    5. Giovanni Cespa & Xavier Vives, 2015. "The Beauty Contest and Short-Term Trading," Journal of Finance, American Finance Association, vol. 70(5), pages 2099-2154, October.
    6. Giovanni Cespa, 2003. "Giffen Goods and Market Making," Working Papers 68, Barcelona Graduate School of Economics.
    7. Giovanni Cespa, 2003. "A comparison of stock market mechanisms," Working Papers 50, Barcelona Graduate School of Economics.
    8. Farhi, Emmanuel & Tirole, Jean, 2015. "Liquid bundles," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 634-655.
    9. Cespa, Giovanni & Vives, Xavier, 2011. "Higher order expectations, illiquidity, and short-term trading," IESE Research Papers D/915, IESE Business School.
    10. 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.
    11. 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.

    More about this item

    Keywords

    Financial economics; information and market efficiency;

    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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