“Short-Term Trading and Asset Prices: Is Short-Term Trading Costly?” by Ms. Xue JIA
Ms. Xue JIA
Ph.D. Candidate in Accounting
Tilburg School of Economics and Management
This paper studies how short-term trading of investors arises endogenously in capital markets and its implications on stock prices. Employing a two-period noisy rational expectations equilibrium model with long-horizon investors, short-horizon investors, and noise traders, the paper shows that long-horizon investors engage in short-term trading to share the first period stock price risk with short-horizon investors. Such short-term trading behavior of long-horizon investors lowers the risk premium in stock price and improves price informativeness on firm's fundamental cash flows. The results also show that such short-term trading of long-horizon investors increases when the firm provides earnings guidance on the short-term cash flow, but decreases when the firm provides guidance on the long-term cash flow.