The Short-Termism of Traders and Equilibrium Multiplicity

17 Pages Posted: 15 Jul 2019

See all articles by Binbin Chen

Binbin Chen

Shandong University of Finance and Economics

Qiang Zhang

Beijing University of Chemical Technology - School of Economics & Management

Shancun Liu

Beihang University (BUAA) - School of Economic and Management Science

Fang Liu

Shandong University of Finance and Economics

Date Written: July 13, 2019

Abstract

We investigate the impacts of the short-termism on multiple equilibria in a dynamic rational expectations equilibrium model. We find that short-termism is not the cause of equilibrium multiplicity but affects market quality of all equilibria. The liquidity, price efficiency and expected trading volume in high trading intensity equilibrium (HTIE) are higher than those in low trading intensity equilibrium (LTIE) no matter how myopic the informed traders are. As investors’ myopia degree increases, this difference between HTIE and LTIE becomes larger. The LTIE is always stable but the speed of convergence to new equilibrium is negatively related to the myopia degree of traders when an unexpected shock moves the price away from equilibrium. The opposite happens in HTIE.

Keywords: short-termism; multiple equilibria; market liquidity; equilibrium stability

JEL Classification: D40, D82, G14

Suggested Citation

Chen, Binbin and Zhang, Qiang and Liu, Shancun and Liu, Fang, The Short-Termism of Traders and Equilibrium Multiplicity (July 13, 2019). Available at SSRN: https://ssrn.com/abstract=3418196 or http://dx.doi.org/10.2139/ssrn.3418196

Binbin Chen (Contact Author)

Shandong University of Finance and Economics ( email )

Erhuan East Road 7366
Jinan, Shandong 250014
China

Qiang Zhang

Beijing University of Chemical Technology - School of Economics & Management ( email )

Beijing
China

Shancun Liu

Beihang University (BUAA) - School of Economic and Management Science

37 Xue Yuan Road
Beijing 100083
China

Fang Liu

Shandong University of Finance and Economics ( email )

Erhuan East Road 7366
Jinan, Shandong 250014
China

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