Informed Trading and Intertemporal Substitution
38 Pages Posted: 8 Sep 2016 Last revised: 11 Oct 2019
Date Written: June 6, 2019
I examine the possibility of information-based trading in a multiperiod consumption setting. I develop a necessary and sufficient condition for trade to occur. Intertemporal substitution introduces a desire to correlate current consumption with future aggregate shocks. When agents have heterogeneous time-inseparable preferences, information differentially affects relative preferences for current and future consumption, making information-based trading mutually acceptable. The no-trade result continues to hold if there is no aggregate shock, or if agents have either homogeneous or time-separable preferences.
Keywords: Informed Trading, No-Trade Theorem
JEL Classification: G12, G14, D53, D82
Suggested Citation: Suggested Citation