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Private Information and Trade Timing

Private Information and Trade Timing By LONES SMITH* This paper investigates the Bayesian decision-theoretic foundations of the popular Wall Street refrain that “timing is everything.” I explore the purely informational motives for trade timing: If public information is being released over time, when is a financially and informationally small and partially informed trader’s “informational edge” over the market at its zenith? In other words, if a trader will not affect the price by his transaction, and he has a fixed investment budget, when should he invest? One might think that with no strategic or other reasons to time his trade, and so long as all information is conditionally independent, he wishes to act at once on any private information— because delay sees only its depreciation. This paper questions this intuition by exploring an informational difference between the calculus of prices and their reciprocals, returns. The paper builds on a timing irrelevance result for Arrow securities, to deduce economically interpretable sufficient conditions for timing impatience of general securities. Investors trade among themselves because they have either different information or preferences, usually diverse risk-sharing needs. The most important and interesting problems in financial timing concern how this drama unfolds in an equilibrium setting, where markets http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Private Information and Trade Timing

American Economic Review , Volume 90 (4) – Sep 1, 2000

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References (10)

Publisher
American Economic Association
Copyright
Copyright © 2000 by the American Economic Association
Subject
Shorter Papers
ISSN
0002-8282
DOI
10.1257/aer.90.4.1012
Publisher site
See Article on Publisher Site

Abstract

By LONES SMITH* This paper investigates the Bayesian decision-theoretic foundations of the popular Wall Street refrain that “timing is everything.” I explore the purely informational motives for trade timing: If public information is being released over time, when is a financially and informationally small and partially informed trader’s “informational edge” over the market at its zenith? In other words, if a trader will not affect the price by his transaction, and he has a fixed investment budget, when should he invest? One might think that with no strategic or other reasons to time his trade, and so long as all information is conditionally independent, he wishes to act at once on any private information— because delay sees only its depreciation. This paper questions this intuition by exploring an informational difference between the calculus of prices and their reciprocals, returns. The paper builds on a timing irrelevance result for Arrow securities, to deduce economically interpretable sufficient conditions for timing impatience of general securities. Investors trade among themselves because they have either different information or preferences, usually diverse risk-sharing needs. The most important and interesting problems in financial timing concern how this drama unfolds in an equilibrium setting, where markets

Journal

American Economic ReviewAmerican Economic Association

Published: Sep 1, 2000

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