A Theory of the Dynamics of Security Returns Around Market Closures,
DOI:
https://doi.org/10.1016/1057-0810(95)90041-1Abstract
Numerous empirical studies document patterns in the means and variances of security returns measured over periods that are punctuated by market closures. This article develops a multiperiod model in which closures delay the resolution of uncertainty, thereby redistrib- uting risk across time and agents. Since agents are risk averse in the model, this redistribution affects the equilibrium price, altering risk premia, liquidity costs, and the degree of infor- mational asymmetry. As a consequence, closures alter both the means and variances of returns. The article demonstrates that closures can generate a variety of mean and variance effects, including those that mirror the empirical phenomena. The Journal of Finance, September 1994,49(4): 1163-l 2 11. (Reprinted with permission of The Journal of Finance.)
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