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By LONES SMITH* This paper investigates the Bayesian decision-theoretic foundations of the popular Wall Street refrain that âtiming is everything.â I explore the purely informational motives for trade timing: If public information is being released over time, when is a ï¬nancially and informationally small and partially informed traderâs âinformational edgeâ over the market at its zenith? In other words, if a trader will not affect the price by his transaction, and he has a ï¬xed 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 informationâ 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 sufï¬cient 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 ï¬nancial timing concern how this drama unfolds in an equilibrium setting, where markets
American Economic Review – American Economic Association
Published: Sep 1, 2000
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