Short-term investment and the informational efficiency of the market

A dynamic finite-horizon market for a risky asset with a continuumof risk-average heterogeneously informed investors and a risk-neutralcompetitive market-making sector is examined. The article analyzesthe effect of investors' horizons on the information contentof prices. It is shown that short horizons enhance or reduceaccumulated price informativeness depending on the temporalpattern of private information arrival. With concentrated arrivalof information, short horizons, reduce final price informativeness;with diffuse arrival of information, short horizons enhanceit. In the process a closed-form solution to the dynamic equilibriumwith long-term investors is derived.