Paper #520

Title:

Short-term investment and equilibrium multiplicity

Author:

Giovanni Cespa

Date:

June 2000 (Revised: June 2002)

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.

Keywords:

Financial economics, information and market efficiency

JEL codes:

G100, G120, G140

Area of Research:

Finance and Accounting

Published in:

European Economic Review, 46, 9, (2002), pp. 1645-1670

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