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The Beauty Contest and Short-Term Trading

Cespa, G. and Vives, X. (2015). The Beauty Contest and Short-Term Trading. The Journal of Finance, 70(5), pp. 2099-2154. doi: 10.1111/jofi.12279


Short-termism need not breed informational price inefficiency even when gen- erating Beauty Contests. We demonstrate this claim in a two-period market with persistent liquidity trading and risk-averse, privately informed, short-term investors and find that prices reflect average expectations about fundamentals and liquidity trading. Informed investors engage in “retrospective” learning to reassess inferences (about fundamentals) made during the trading game’s early stages. This behavior introduces strategic complementarities in the use of information and can yield two stable equilibria that can be ranked in terms of liquidity, volatility, and informational efficiency. We derive implications that explain market anomalies as well as empirical regularities.

Publication Type: Article
Additional Information: This is the peer reviewed version of the following article: Cespa, G. & Vives, X. (2015). The Beauty Contest and Short-Term Trading. The Journal of Finance, 70(5), pp. 2099-2154., which is published in final form at This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Publisher Keywords: price speculation, multiple equilibria, average expectations, public information, momentum and reversal, disagreement, volume, volatility
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Date available in CRO: 16 Jun 2015 15:17
Date deposited: 14 September 2016
Date of first online publication: 3 September 2015
Text - Accepted Version
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