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| Author: | Shleifer, A. Vishny, R. W. |
| Title: | Equilibrium short horizons for investors and firms |
| Journal: | American Economic Review
1990 : MAY, VOL. 80:2, p. 148-153 |
| Index terms: | INVESTMENT EQUILIBRIUM ANALYSIS ARBITRAGE PRICING THEORY CAPITAL ASSET PRICING |
| Language: | eng |
| Abstract: | The often questioned pursuit by investors of short-term capital gains and the selection by firms of short-term investment projects is discussed. The starting point is that arbitrage (trading based on knowledge that the price of an asset is different from its fundamental value) is cheaper for assets that cannot stay mispriced for long (short-term assets) than for assets that can (long-term assets). In equilibrium, the net expected return from arbitrage in each asset must be the same. Since arbitrage in long-term assets is more expensive than in short-term assets, the former must be more mispriced in equilibrium for net returns to be equal. The rational behaviour of arbitrators leads to greater mispricing of long-term assets in equilibrium. |
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