Risk Aversion, Liquidity, and Endogenous Short Horizons
University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School
Craig W. Holden
Indiana University - Kelley School of Business - Department of Finance
REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 2
We analyze a competitive model in which different information signals get reflected in value at different points in time. If investors are sufficiently risk averse, we obtain an equilibrium in which all investors focus exclusively on the short-term. In addition, we show that increasing the variance of informationless trading increases market depth but causes a greater proportion of investors to focus on the short-term signal, which decreases the informativeness of prices about the long-run. Finally, we also explore parameter spaces under which long-term informed agents wish to voluntarily disclose their information.
JEL Classification: D40, D82, G14
Date posted: July 24, 1996
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