SHORT-TERM INVESTMENT AND THE INFORMATIONAL EFFICIENCY OF THE MARKET

A dynamic finite-horizon market for a risky asset with a continuum of risk-averse heterogeneously informed investors and a risk-neutral comp etitive market-making sector is examined. The article analyzes the eff ect of investors' horizons on the information content of prices. It is shown that short horizons enhance or reduce accumulated price informa tiveness depending on the temporal pattern of private information arri val. With concentrated arrival of information, short horizons reduce f inal price informativeness; with diffuse arrival of information, short horizons enhance it. In the process a closed-form solution to the dyn amic equilibrium with long-term investors is derived.