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Private Information and Trade Timing

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  • Lones Smith

Abstract

This paper investigates the Bayesian decision-theoretic foundations of the Wall Street adage that `timing is everything'. One might think that a `small' risk-neutral trader wishes to act immediately upon any private information he possesses. I begin with a counterintuitive nding that trade timing doesn't matter for an Arrow security, as one's expected return per dollar invested is a martingale. This timing irrelevance discovery motivates an analysis of general compound securities. While timing there is ambiguous, I nd that natural monotone likelihood ratio assumptions on both private and public information restore the intuition that one should trade with all due dispatch.
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Suggested Citation

  • Lones Smith, 2000. "Private Information and Trade Timing," American Economic Review, American Economic Association, vol. 90(4), pages 1012-1018, September.
    • Handle: RePEc:aea:aecrev:v:90:y:2000:i:4:p:1012-1018
    Note: DOI: 10.1257/aer.90.4.1012
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.90.4.1012
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    References listed on IDEAS

    as
    1. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
    2. Athey, S, 1996. "Comparative Statics under Uncertainty : Single Crossing Properties and Log-Supermodularity," Working papers 96-22, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-168, February.
    4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    5. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    6. Foster, F Douglas & Viswanathan, S, 1996. "Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
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    Cited by:

    1. Andreas Park & Daniel Sgroi, 2008. "Herding and Contrarianism in a Financial Trading Experiment with Endogenous Timing," Working Papers tecipa-341, University of Toronto, Department of Economics.
    2. Katya Malinova & Andreas Park, 2009. "Intraday Trading Patterns: The Role of Timing," Working Papers tecipa-365, University of Toronto, Department of Economics.
    3. Kendall, Chad, 2018. "The time cost of information in financial markets," Journal of Economic Theory, Elsevier, vol. 176(C), pages 118-157.
    4. Andreas Park, 2008. "Bid-Ask Spreads and Volume:The Role of Trade Timing," Working Papers tecipa-309, University of Toronto, Department of Economics.
    5. Park, Andreas & Sgroi, Daniel, 2012. "Herding, contrarianism and delay in financial market trading," European Economic Review, Elsevier, vol. 56(6), pages 1020-1037.
    6. Malinova, Katya & Park, Andreas, 2014. "The impact of competition and information on intraday trading," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 55-71.

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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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