Journal of Finance Vol. 75 No. 2 2020
Informed Trading and Intertemporal Substitution
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.
- DOI
- 10.1111/jofi.12857
- Volume
- 75
- Issue
- 2
- Pages
- 1135-1156
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref