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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.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 99 (1989)
Issue (Month): 395 (Supplement)
Pages: 152-67

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Handle: RePEc:ecj:econjl:v:99:y:1989:i:395:p:152-67

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Cited by:
  1. 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.
  2. Lucian Arye Bebchuk & Chaim Fershtman, 1991. "The Effects of Insider Trading on Insiders' Choice Among Risky Investment Projects," NBER Technical Working Papers 0096, National Bureau of Economic Research, Inc.
  3. 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.

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