Preferences, common knowledge and speculative trade

James Dow, Sergio Werlang and Vicente Madrigal

No 149, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: We study the proposition that if it is common knowledge that en allocation of assets is ex-ante pareto efficient, there is no further trade generated by new information. The key to this result is that the information partitions and other characteristics of the agents must be common knowledge and that contracts, or asset markets, must be complete. It does not depend on learning, on 'lemons' problems, nor on agreement regarding beliefs and the interpretation of information. The only requirement on preferences is state-additivity; in particular, traders need not be risk-averse. We also prove the converse result that 'no-trade results' imply that traders' preferences can be represented by state-additive utility functions. We analyze why examples of other widely studied preferences (e.g., Schmeidler (1989)) allow 'speculative' trade.

Date: 1990-01
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://repositorio.fgv.br/bitstreams/adb2aadb-30b ... 5c3cde8e31e/download (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:149

Access Statistics for this paper

More papers in FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil) Contact information at EDIRC.
Bibliographic data for series maintained by Núcleo de Computação da FGV EPGE ().