Information, Trade and Derivative Securities

London Business School Institute of Finance and Accounting Working Paper 188

Posted: 2 Sep 1999

See all articles by Michael J. Brennan

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

H. Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area

Multiple version iconThere are 3 versions of this paper

Abstract

In this paper, we address the introduction of new markets in the context of a noisy rational expectations model of the type of Hellwig (1990), by assuming that knowledge about final payoffs emerges gradually over time and then considering the effect of allowing investors to trade more frequently. This welfare gain for an individual investor from more frequent trading is shown to be an increasing function of the absolute value of the difference between the precision of his prior information and the risk tolerance weighted average precision of all investors; it is also (and equivalently) an increasing function of the volume of trade of the investor. We also demonstrate that, for a given number of market sessions, welfare is maximized when information is released in such a way that the variance of price change between successive market sessions is constant over time. This result provides a social justification for disclosure laws that require firms to disclose material new information immediately, rather than saving the disclosure for the periodic financial statement dates.

JEL Classification: G14

Suggested Citation

Brennan, Michael John and Cao, Huining Henry, Information, Trade and Derivative Securities. London Business School Institute of Finance and Accounting Working Paper 188. Available at SSRN: https://ssrn.com/abstract=5483

Michael John Brennan (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825 3587 (Phone)
310-206 8419 (Fax)

Huining Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
684
PlumX Metrics