This article presents a framework for analyzing the dynamic effects of
anticipated large demand pressures on asset risk premia. The authors show
that large institutions who can time their entry into the market will
trade either at the open or during periods of unusual demand pressures.
They show that if these institutions do enter later in the day, they trade
in the same direction as institutions which provide liquidity
continuously; institutions therefore appear to exhibit 'herding' behavior.
The authors also explore how changing the uncertainty of demand pressures
late in the day affects trading costs throughout the day.
Copyright 1995 by American Finance Association.