In a comment, Peter Bossaerts and William R. Zame [2006. Finance Research Letters. This issue] claim that the main result of our paper [Judd, K.L., Kubler, F., Schmedders, K., 2003. The Journal of Finance 58, 2203-2217], namely the no-trade theorem for the dynamic Lucas infinite horizon economy with heterogeneous agents, is an artifact of the assumption that asset dividends and individual endowments follow the same stationary finite-state Markov process. In this reply, we clarify our assumptions and contrast them with the examples in Bossaerts and Zame.
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