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An Equilibrium Model of Informed Trading and Portfolio Rebalancing
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
doi:10.2139/ssrn.1332524
fatcat:mog2ky55yrdcncezwkfkmklnqa