Short-Term Investment and Equilibrium Multiplicity

UPF Economics and Business Working Paper No. 520

32 Pages Posted: 29 Jun 2001

See all articles by Giovanni Cespa

Giovanni Cespa

Bayes Business School; Bayes Business School; Centre for Economic Policy Research (CEPR)

Date Written: June 2002

Abstract

I study the effects of the heterogeneity of traders' horizons in a 2-period NREE model where all traders are risk averse. Owing to risk premia, short termism generates multiple equilibria. In particular two distinct patterns arise. Along the "low trading intensity equilibrium," short termists anticipate a thinner second period market and, owing to risk aversion, scale back their trades. This reduces both risk sharing and information impounding into prices, enforcing a high returns' volatility-low price informativeness equilibrium. Along the "high trading intensity equilibrium," the opposite happens and a low volatility-high price informativeness equilibrium arises. Thus, in the presence of short-term behavior and traders' risk aversion, periods of high volatility are a signal of poor price informativeness.

Note: Previously titled: Inventory Effects and Trading Horizons

Keywords: Financial Economics, Information and Market Efficiency, Multiple Equilibria

JEL Classification: G100, G120, G140

Suggested Citation

Cespa, Giovanni and Cespa, Giovanni, Short-Term Investment and Equilibrium Multiplicity (June 2002). UPF Economics and Business Working Paper No. 520, Available at SSRN: https://ssrn.com/abstract=273402 or http://dx.doi.org/10.2139/ssrn.273402

Giovanni Cespa (Contact Author)

Bayes Business School ( email )

United Kingdom

Bayes Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44(0)2040708704 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
110
Abstract Views
2,331
Rank
447,736
PlumX Metrics