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Information and Equilibrium with Inside Traders

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  • Mirman, Leonard J
  • Samuelson, Larry

Abstract

This paper examines a market in which an informed agent or insider trades with uninformed agents whose expectations are conditioned on the information revealed by prices. The authors find that insiders can capitalize on their private information, with those receiving favorable (unfavorable) information tending to buy (sell) the risky asset. However, the ability of uninformed agents to infer information from market prices causes the insider to moderate his actions. Insiders with favorable (unfavorable) information reveal this information gradually by initially buying less (selling less) of the risky asset than would be the case if such learning did not occur. Copyright 1989 by Royal Economic Society.

Suggested Citation

  • Mirman, Leonard J & Samuelson, Larry, 1989. "Information and Equilibrium with Inside Traders," Economic Journal, Royal Economic Society, vol. 99(395), pages 152-167, Supplemen.
    • Handle: RePEc:ecj:econjl:v:99:y:1989:i:395:p:152-67
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    Cited by:

    1. Lucian Arye Bebchuk & Chaim Fershtman, 1990. "The Effects of Insider Trading on Insiders' Choice Among Risky Investment Projects," Discussion Papers 897, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Lucian Arye Bebchuk & Chaim Fershtman, 1990. "The Effect of Insider Trading on Insiders' Reaction to Opportunities to 'Waste' Corporate Value," Discussion Papers 889, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Michael Baye & Ann Gillette & Casper Vries, 1994. "Limit orders, asymmetric information, and the formation of asset prices with a computerized specialist," Journal of Economics, Springer, vol. 59(1), pages 71-96, February.
    4. Hsu, Chih-Hsiang, 2016. "Strategic noise trading of later-informed traders in a multi-market framework," Economic Modelling, Elsevier, vol. 54(C), pages 235-243.
    5. Estrada, Javier, 1994. "Insider trading: regulation, securities markets, and welfare under risk neutrality," UC3M Working papers. Economics 2922, Universidad Carlos III de Madrid. Departamento de Economía.
    6. Estrada, Javier, 1995. "Insider trading: regulation, securities markets, and welfare under risk aversion," UC3M Working papers. Economics 3901, Universidad Carlos III de Madrid. Departamento de Economía.

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