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Informed trading and stock market efficiency

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  • Taneli M�kinen

    (Bank of Italy)

Abstract

The information content of stock prices is analysed without imposing strong restrictions on traders' preferences and the distribution of dividends. Noise in the information contained in equilibrium prices arises from endogenous asset supply, which offsets price movements due to informed trading. The informativeness of stock prices increases with the wealth of the informed traders and decreases with the risk-free rate, as stock prices respond more strongly to information held by informed traders when they take larger positions in stocks.

Suggested Citation

  • Taneli M�kinen, 2014. "Informed trading and stock market efficiency," Temi di discussione (Economic working papers) 992, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_992_14
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    References listed on IDEAS

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    More about this item

    Keywords

    asset markets; asymmetric information; rational expectations equilibrium;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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