Discretionary Trading and Asset Price Volatility

34 Pages Posted: 15 Feb 2006

See all articles by Jahangir Aziz

Jahangir Aziz

International Monetary Fund (IMF) - Asia and Pacific Department

Date Written: October 1995

Abstract

Against the backdrop of emerging stock markets, this paper examines an asset market where investors behave strategically based on their private information. It is shown that if the investor base expands in the form of more informed traders entering the market, in contrast to the commonly held view, price volatility actually increases. Moreover, if entry is endogenized using transaction costs (brokerage fees), it turns out that the level of participation is stochastic and the market displays "excess volatility" in price. Informed traders participate in trading only when they believe that the probability of making speculative profits is large and therefore informed trading is discretionary. An extension of the model opens up the possibility of the market displaying informational herding-like behavior despite traders having long trading horizons.

JEL Classification: D82, G12

Suggested Citation

Aziz, Jahangir, Discretionary Trading and Asset Price Volatility (October 1995). IMF Working Paper No. 95/104, Available at SSRN: https://ssrn.com/abstract=883251

Jahangir Aziz (Contact Author)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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