An Equilibrium Model of Informed Trading and Portfolio Rebalancing

Jan Schneider
2009 Social Science Research Network  
A key intuition of standard rational expectations models is that private information about future payoffs can by itself not generate trading. Trading is only possible if there is an additional motive for trading such as for example liquidity trading. In this paper I show how this misleading intuition results from an assumption that all of these models have in common: investors have negative exponential (CARA) utility functions. I develop a rational expectations equilibrium where uninformed
more » ... ere uninformed investors are willing to trade with informed investors even though they know that they trade with someone who possesses superior information.
doi:10.2139/ssrn.1332524 fatcat:mog2ky55yrdcncezwkfkmklnqa