On the effects of restricting short-term investment, Review of Financial Studies
This paper studies the effects of restrictions on high-frequency investment for price informativeness and the profits and utility of low-frequency investors. We examine a variant of the standard noisy rational expectations framework in which both the exposures of investors and their information about future fundamentals endogenously vary across future dates. In this environment, precluding investors from holding portfolios with exposures to fundamentals that change at high frequency has zero effect on the information embedded in prices about lower-frequency variation in fundamentals. Furthermore, while the entry of high-frequency investors reduces the profits of low-frequency investors, restricting high-frequency investment in response only makes the problem worse.