On the Irrelevance of Trade Timing

MIT Department of Economics Working Paper No.96-6

Posted: 16 Nov 1998

See all articles by Lones Smith

Lones Smith

University of Wisconsin at Madison - Department of Economics

Date Written: February 1996

Abstract

Given standard, transparent assumptions, this paper questions the Wall Street adage that "timing is everything." I show that for an Arrow security, a "small" risk-neutral trader with private information that is conditionally independent of the public information is exactly indifferent about the timing of his trade: His expected return per dollar invested is a martingale. This is true despite the fact that he expects the asset price itself to rise given favorable information and fall given unfavorable information.

I demonstrate the result in generality and point out that the Arrow security assumption cannot be relaxed: with compound securities paying on two states, there is a (generically strict) preference to trade immediately, while for more general assets, the result is ambivalent -- one may even with to delay trading!

JEL Classification: D82, G12

Suggested Citation

Smith, Lones, On the Irrelevance of Trade Timing (February 1996). MIT Department of Economics Working Paper No.96-6, Available at SSRN: https://ssrn.com/abstract=139524

Lones Smith (Contact Author)

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