Informed Trading and Intertemporal Substitution

38 Pages Posted: 8 Sep 2016 Last revised: 11 Oct 2019

See all articles by Yizhou Xiao

Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: June 6, 2019

Abstract

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

Xiao, Yizhou, Informed Trading and Intertemporal Substitution (June 6, 2019). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2834694 or http://dx.doi.org/10.2139/ssrn.2834694

Yizhou Xiao (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/yizhouxiao/

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