Private Information and Trade Timing

Lones Smith

Working Papers from Michigan - Center for Research on Economic & Social Theory

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.

Keywords: DECISION MAKING; FINANCIAL MARKET; INFORMATION (search for similar items in EconPapers)
JEL-codes: D81 G14 (search for similar items in EconPapers)
Pages: 10 pages
Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:fth:michet:99-07

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