Article1995

Short-Term Investment and the Informational Efficiency of the Market

166 citations0/0 files storedReview of Financial Studies

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Financial Markets and Investment Strategies Stochastic processes and financial applications Economic theories and models

Abstract

A dynamic finite-horizon market for a risky asset with a continuum of risk-averse heterogeneously informed investors and a risk-neutral competitive market-making sector is examined. The article analyzes the effect of investors’ horizons on the information content of prices. It is shown that short horizons enhance or reduce accumulated price informativeness depending on the temporal pattern of private information arrival. With concentrated arrival of information, short horizons, reduce final price informativeness; with diffuse arrival of information, short horizons enhance it. In the process a closed-form solution to the dynamic equilibrium with long-term investors is derived.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1985Continuous Auctions and Insider Trading 1990Noise Trader Risk in Financial Markets 1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 1980On the Impossibility of Informationally Efficient Markets 1980On the Impossibility of Informationally Efficient Markets 1988A Theory of Intraday Patterns: Volume and Price Variability 1987Price, trade size, and information in securities markets

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