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Trade Timing, Price Volatility and Serial Correlation

Authors


  • We are greatly indebted to the anonymous referee for the helpful commends and suggestions. This work has been supported by National Science Council, R.O.C., under Grant NSC99-2410-H-158-004. Correspondence: Ming-Chang Wang.

Abstract

This study sets up a multiple-period, competitive rational expectations model to facilitate an examination into how informed traders time their trading on private information so as to maximise their expected utility. We find that, in equilibrium, informed traders may elect to trade late on their information, a result which contradicts other competitive rational expectations models in which it is generally assumed that informed traders will trade immediately upon receiving private information. Our results imply that price volatility will increase and price changes may display positive serial correlation. This phenomenon helps to explain the excess volatility puzzle of asset prices and medium-term continuations (momentum).

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