Journal Article

Risk Aversion, Liquidity, and Endogenous Short Horizons

Craig W. Holden and Avanidhar Subrahmanyam

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 9, issue 2, pages 691-722
Published in print April 1996 | ISSN: 0893-9454
Published online June 2015 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/9.2.691
Risk Aversion, Liquidity, and Endogenous Short Horizons

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We analyze a competitive model in which different information signals get reflected in value at different points in time. If investors are sufficiently risk averse, we obtain an equilibrium in which all investors focus exclusively on the short term. In addition, we show that increasing the variance of informationless trading increases market depth but causes a greater proportion of investors to focus on the short-term signal, which decreases the informativeness of prices about the long run. Finally, we also explore parameter spaces under which long-term informed agents wish to voluntarily disclose their information.

Journal Article.  12644 words.  Illustrated.

Subjects: Financial Markets

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