Yuan, Kathy (2005) The liquidity service of benchmark securities. Journal of the European Economic Association, 3 (5). pp. 1156-1180. ISSN 1542-4774
Abstract
We demonstrate that benchmark securities allow heterogeneously informed investors to create trading strategies that are perfectly aligned with their signals. Investors who are informed about security-specific risks but uninformed about systematic risks can take an offsetting position in benchmark securities to eliminate exposure to adverse selection in systematic risks, while investors who are informed about systematic risks but uninformed about security-specific risks can trade systematic risks exclusively using benchmark securities. We further show that introduction of benchmark securities encourages more investors to acquire both security-specific and systematic-factor information, which leads to increased liquidity and price informativeness for all individual securities.
| Item Type: | Article |
|---|---|
| Official URL: | http://onlinelibrary.wiley.com/journal/10.1111/(IS... |
| Additional Information: | © 2005 European Economic Association |
| Library of Congress subject classification: | H Social Sciences > HG Finance |
| Journal of Economic Literature Classification System: | G - Financial Economics > G1 - General Financial Markets > G10 - General G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies |
| Sets: | Departments > Finance Collections > Economists Online |
| Date Deposited: | 01 Dec 2011 15:23 |
| URL: | http://eprints.lse.ac.uk/39844/ |
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