Economics at your fingertips  

Long-term Information, Short-lived Securities

Dan Bernhardt (), Ryan Davies and John Spicer
Additional contact information
John Spicer: European Economic Research Ltd, London

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: We explore strategic trade in short-lived securities by agents who possess long-term information. Trading short-lived securities is profitable only if enough of the private information becomes public prior to contract expiration; otherwise the security will worthlessly expire. We highlight how this results in trading behavior fundamentally different from that observed in standard models of informed trading in equity. Specifically, we show that informed agents are more reluctant to trade shorter-term securities too far in advance of when their information will necessarily be made public, and that existing positions in a shorter-term security make future purchases more attractive. Because informed agents prefer longer-term securities, this can make trading shorter-term contracts more attractive for liquidity traders. We characterize the conditions under which liquidity traders choose to incur extra costs to roll over short-term positions rather than trade in distant contracts, providing an explanation for why most longer-term derivative security markets have little liquidity and large bid-ask spreads.

Keywords: Priviate information; derivative securities; rolling the hedge; fixed transaction costs (search for similar items in EconPapers)
JEL-codes: D82 G1 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2003-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link) (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found ( [302 Found]-->

Related works:
Journal Article: Long‐term information, short‐lived securities (2006) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading Contact information at EDIRC.
Bibliographic data for series maintained by Marie Pearson ().

Page updated 2022-01-22
Handle: RePEc:rdg:icmadp:icma-dp2003-10