Long-term information, short-lived securities

✍ Scribed by Dan Bernhardt; Ryan J. Davies; John Spicer

• Book ID: 102844036
• Publisher: John Wiley and Sons
• Year: 2006
• Tongue: English
• Weight: 555 KB
• Volume: 26
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.20204

✦ Synopsis

The authors explore strategic trade in short-lived securities by agents who have private information that is potentially long-term, but do not know how long their information will remain private. 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. How this results in trading behavior fundamentally different from that observed in standard models of informed trading in equity is highlighted. Specifically, it is shown that informed speculators 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 shorterterm security make future purchases more attractive. Because informed

The views expressed are those of the authors. We are grateful for comments received from David Brown, Melanie Cao, Michael Goldstein, Laurie Krigman, Bob Webb (the Editor), an anonymous referee, and seminar participants at