On the Irrelevance of Trade Timing
MIT Department of Economics Working Paper No.96-6
Posted: 16 Nov 1998
Date Written: February 1996
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: Suggested Citation