Risk seekers: trade, noise, and the rationalizing effect of market impact on convex preferences

Efstathios Avdis - Dec 30, 2019

Long-held intuition dictates that information-based trade is impossible without exogenous noise. Risk seekers can resolve this conundrum. Even though such agents have negative risk aversion, they act as utility maximizers because they fully internalize their impact on prices. If their love of risk increases, information decreases in the aggregate, making prices noisier and returns more volatile. If public information becomes more precise, risk sharing decreases but welfare increases, contradicting the Hirshleifer effect. If private information becomes cheaper, liquidity always increases, rendering economies with risk seekers empirically distinct from economies with noise traders or random endowments.


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market design risk seeking Rationality inefficient markets information acquisition Liquidity




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Risk seekers: trade, noise, and the rationalizing effect of market impact on convex preferences

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