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In Rememberance: World Trade Center (WTC)

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Risk Aversion, Liquidity, and Endogenous Short Horizons

by Craig W. Holden of Indiana University, and
Avanidhar Subrahmanyam of the University of California, Los Angeles

Summer 1996

Abstract: We analyze a competitive model in which different information signals get reflected in value at different points in time. If investors are sufficiently risk averse, we obtain an equilibrium in which all investors focus exclusively on the short term. In addition, we show that increasing the variance of informationless trading in-creases market depth but causes a greater proportion of investors to focus on the short-term signal, which decreases the informative-ness of prices about the long run. Finally, we also explore parameter spaces under which long-term informed agents wish to voluntarily disclose their information.

Published in: Review of Financial Studies, Vol. 9, No. 2, (Summer 1996), pp. 691-722.

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