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Information, Trade and Incomplete Markets

Lawrence Blume, Tarek Coury and David Easley
Economic Theory
Vol. 29, No. 2, Symposium in Honor of Mukul Majumdar (Oct., 2006), pp. 379-394
Published by: Springer
Stable URL: http://www.jstor.org/stable/25054354
Page Count: 16
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Information, Trade and Incomplete Markets
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Abstract

The no-trade result of Milgrom and Stokey, J Econ Theory 26:17-27 (1982), states that if rational traders begin with an ex-ante Pareto optimal allocation then the arrival of information cannot generate trade. This paper allows traders to trade before and after the arrival of information. If there are enough securities to hedge against all payoff relevant risk, then the preinformation-arrival allocation is Pareto optimal and information arrival has no effect. This no-retrade result is the competitive analog of the no-trade result of Milgrom and Stokey (1982). However, information generically generates trade when markets are state-contingent incomplete.

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