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Publication year
Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage
Resource type
Authors/contributors
- Edmans, Alex (Author)
- Goldstein, Itay (Author)
- Jiang, Wei (Author)
Title
Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage
Abstract
We analyze strategic speculators' incentives to trade on information in a model where firm value is endogenous to trading, due to feedback from the financial market to corporate decisions. Trading reveals private information to managers and improves their real decisions, enhancing fundamental value. This feedback effect has an asymmetric effect on trading behavior: it increases (reduces) the profitability of buying (selling) on good (bad) news. This gives rise to an endogenous limit to arbitrage, whereby investors may refrain from trading on negative information. Thus, bad news is incorporated more slowly into prices than good news, potentially leading to overinvestment. (JEL D83, G12, G14)
Publication
American Economic Review
Volume
105
Issue
12
Pages
3766-97
Date
2015-12
Citation
Edmans, A., Goldstein, I., & Jiang, W. (2015). Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage. American Economic Review, 105, 3766–3797.
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