Informed Trading and Intertemporal Substitution |
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| Authors: | YIZHOU XIAO |
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| Affiliation: | 1. Yizhou Xiao is with the CUHK Business School, Chinese University of Hong Kong. I am especially grateful to Paul Pfleiderer, Bradyn Breon-Drish, Peter DeMarzo, and Timothy McQuade for their invaluable support and advice. I also thank the editor (Philip Bond), the anonymous associate editor, and two anonymous referees for their valuable suggestions that substantially improved the paper. For helpful comments and stimulating discussions, I also thank Anat Admati, Jaroslav Borovicka, Alberto Teguia, Steven Grenadier, Zhiguo He, Peter Koudijs, Ilan Kremer, Hanno Lustig, Paul Milgrom, Andrzej Skrzypacz, Robert Willson, Liyan Yang, and audiences at various seminars and conferences. Any errors that remain are mine. I do not have any potential conflicts of interest to disclose, as identified in The Journal of Finance's disclosure 2. policy. |
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| 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. |
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