This paper develops a dynamic model of strategic trading under asymmetric information. Following a shock to public information, private information, or noise trading, the risk-averse informed agent behaves like a trend-chaser in the short run and a contrarian in the long run, and it may take a long time for the stock price to converge to its fundamental value. The orders of the informed agent are positively autocorrelated over a short period of time but negatively autocorrelated over a longer period of time. We find that the past order flows of the informed agent can be used to forecast future stock returns. There exists a positive relationship among trading volume, market impact cost, and price volatility.
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