Adverse Selection and Re-Trade∗

Abstract

We study how present and future adverse selection costs affect the prices of assets that may be traded repeatedly. We find that adverse selection is not a trading cost on average, and therefore future trading “costs” have no direct impact on current prices. Adverse selection can lead to allocation inefficiencies, which influence prices. Specifically, prices are reduced by the present value of all future allocation costs. We show that adverse selection affects assets of different maturities differently. Further, we study how adverse selection interacts with the macro economy.

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Cite this paper

@inproceedings{Grleanu2001AdverseSA, title={Adverse Selection and Re-Trade∗}, author={Nicolae G{\^a}rleanu and Lasse Heje Pedersen}, year={2001} }