Information and Trading Targets in a Dynamic Market Equilibrium
75 Pages Posted: 8 Feb 2015 Last revised: 19 Apr 2018
Date Written: April 7, 2018
This paper describes equilibrium interactions between dynamic portfolio rebalancing given a private end-of-day trading target and dynamic trading on long-lived private information. Order-splitting for portfolio rebalancing injects multi-faceted dynamics in the market. These include autocorrelated order flow, sunshine trading, endogenous learning, and short-term speculation. The model has testable implications for intraday patterns in volume, liquidity, price volatility, order-flow autocorrelation, differences between informed-investor and rebalancer trading strategies, and for how these patterns comove with trading-target volatility and other market conditions.
Keywords: Order-splitting, parent and child orders, optimal order execution, portfolio rebalancing, market microstructure
JEL Classification: G14
Suggested Citation: Suggested Citation