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.