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Snowballing private information

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  • Sadzik, Tomasz
  • Woolnough, Chris

Abstract

We study informational efficiency in a model of strategic dynamic trade with a monopolistic informed trader. The informed trader continuously receives information about the growth rate of asset dividends and trades against market makers and liquidity traders. We show that when the private information is multi-dimensional, or growth rate of expected dividends is relatively high, private information snowballs over time and the informed trader reveals his information about the asset with delay. This contrasts with the informational efficiency of the workhorse model with one-dimensional information and no growth (see Chau and Vayanos (2008) and Caldentey and Stacchetti (2010)). We also show that the extent of the steady-state excess price volatility is linear in the market's variance about the value.

Suggested Citation

  • Sadzik, Tomasz & Woolnough, Chris, 2021. "Snowballing private information," Journal of Economic Theory, Elsevier, vol. 198(C).
    • Handle: RePEc:eee:jetheo:v:198:y:2021:i:c:s0022053121001502
    DOI: 10.1016/j.jet.2021.105333
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    1. Chen, Zhenhua & Liu, Zhenya & Teka, Hanen & Zhang, Yifan, 2022. "Smart money in China's A-share market: Evidence from big data," Research in International Business and Finance, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    Market microstructure; Insider trading; Multi-dimensional information; Excess volatility;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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