financial economics Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade". William F. Sharpe"Financia ...

, the no-trade theorem states that if # markets are in a state of efficient equilibrium # there are no

noise trader A noise trader is a stock trader whose decisions to buy or sell are based on "factors they believe to be helpful but in reality will give them no better returns than random choices". These factors may include hype or rumor, which noise traders beli ...

s or other non-rational interferences with prices # the structure by which traders or potential traders acquire information is itself common knowledge then even though some traders may possess private information, none of them will be in a position to profit from it. The assumptions are deliberately unrealistic, but the theorem may nonetheless be pertinent to debates over

inside information Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company. In various countries, some kinds of trading based on insider informatio ...

. It was demonstrated by

Paul Milgrom Paul Robert Milgrom (born April 20, 1948) is an American economist. He is the Shirley and Leonard Ely Professor of Humanities and Sciences at Stanford University, the Stanford University School of Humanities and Sciences, a position he has held ...

and

Nancy Stokey Nancy Laura Stokey (born May 8, 1950) has been the Frederick Henry Prince Distinguished Service Professor of Economics at the University of Chicago since 1990 and focuses particularly on mathematical economics while recently conducting research a ...

in their 1982 paper, "Information, trade and common knowledge".

Informal explanation

The idea behind the proof of the no-trade theorem is that if there is common knowledge about the structure of a market, then any bid or offer (i.e. attempt to initiate a trade) will reveal the bidder's private knowledge and will be incorporated into

market price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...

s even before anyone accepts the bid or offer, so no profit will result. Another way to put it is: all the traders in the market are rational, and thus they know that all the prices are rational/efficient; therefore, anyone who makes an offer to them must have special knowledge, else why would they be making the offer? Accepting the offer would make them a loser. All the traders will reason the same way, and thus will not accept any offers.

Informal explanation

Notes

See also