Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/56222 
Year of Publication: 
2006
Series/Report no.: 
SSE/EFI Working Paper Series in Economics and Finance No. 644
Publisher: 
Stockholm School of Economics, The Economic Research Institute (EFI), Stockholm
Abstract: 
We construct a parsimonious model of a financial market where the marginal investor is an endogenous noise trader. Such a trader anticipates that future shocks may force him to exit his position. In compensation he requires a higher return. We show that the original seller of the asset pays the required return. This can only be optimal if the seller has access to an investment opportunity that gives a sufficiently high return, compared to the noise trader's investment opportunities. We also show that, if the noise trader expects to get informative signals, the required return does not necessarily decrease, as claimed in the earlier literature.
Subjects: 
Market microstructure
no-trade theorems
adverse selection
JEL: 
G14
Document Type: 
Working Paper

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