Dynamic Asset Allocation and the Informational Efficiency of Markets

  • Author(s): SANFORD J. GROSSMAN
  • Published: Apr 30, 2012
  • Pages: 773-787
  • DOI: 10.1111/j.1540-6261.1995.tb04036.x

ABSTRACT

Markets have an allocational role; even in the absence of news about payoffs, prices change to facilitate trade and allocate resources to their best use. Allocational price changes create noise in the signal extraction process, and markets where such trading is important are markets in which we may expect to find a failure of informational efficiency. An important source of allocational trading is the use of dynamic trading strategies caused by the incomplete equitization of risks. Incomplete equitization causes trade. Trade implies the inefficiency of passive strategies, thus requiring investors to determine whether price changes are informational or allocational.

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