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Informed Trading and Intertemporal Substitution
Author(s) -
XIAO YIZHOU
Publication year - 2020
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12857
Subject(s) - consumption (sociology) , substitution (logic) , economics , shock (circulatory) , aggregate (composite) , homogeneous , microeconomics , econometrics , computer science , medicine , social science , materials science , physics , sociology , composite material , thermodynamics , programming language
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.