Abstract

http://ssrn.com/abstract=1332524
 
 

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An Equilibrium Model of Informed Trading and Portfolio Rebalancing


Jan Schneider


University of Texas at Austin - Department of Finance

January 24, 2009


Abstract:     
A key intuition of standard rational expectations models is that private information about future payoffs can by itself not generate trading. Trading is only possible if there is an additional motive for trading such as for example liquidity trading. In this paper I show how this misleading intuition results from an assumption that all of these models have in common: investors have negative exponential (CARA) utility functions. I develop a rational expectations equilibrium where uninformed investors are willing to trade with informed investors even though they know that they trade with someone who possesses superior information.

Number of Pages in PDF File: 45

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Date posted: January 25, 2009 ; Last revised: March 19, 2009

Suggested Citation

Schneider, Jan, An Equilibrium Model of Informed Trading and Portfolio Rebalancing (January 24, 2009). Available at SSRN: http://ssrn.com/abstract=1332524 or http://dx.doi.org/10.2139/ssrn.1332524

Contact Information

Jan Schneider (Contact Author)
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
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