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Insider trading with partially informed traders

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Author Info

  • Aase, Knut K.

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Bjuland, Terje

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Øksendal, Bernt

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

The single auction equilibrium of Kyle's (1985) is studied, in which noise traders may be partially informed, or alternatively they can be manipulated. Unlike Kyle's assumption that the quantity traded by the noise traders is independent of the asset value, we assume that the noise traders are able to correlate their trade with the true price. This has several implications for the equilibrium, one being that the insider's expected profits decrease as the noise traders' ability to correlate positively improve. In the limit, the noise traders do not lose on average, and the insider makes zero expected profits. When the correlation is negative, we interpret this as manipulation. In this case the insider makes the highest expected profits, and the informativeness of prices is at its minimum.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2011/21.

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Length: 16 pages
Date of creation: 15 Nov 2011
Date of revision:
Handle: RePEc:hhs:nhhfms:2011_021

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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Keywords: Insider trading; asymmetric information; strategic trade; correlated trade; partially informed noise traders;

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  1. James Dow & Gary Gorton, 1993. "Arbitrage Chains," NBER Working Papers 4314, National Bureau of Economic Research, Inc.
  2. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
  3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  4. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
  5. James Dow & Gary Gorton, 2006. "Noise Traders," NBER Working Papers 12256, National Bureau of Economic Research, Inc.
  6. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
  7. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
  8. Aase, Knut K. & Bjuland, Terje & Øksendal, Bernt, 2010. "An anticipative linear filtering equation," Discussion Papers 2010/8, Department of Business and Management Science, Norwegian School of Economics.
  9. Aase, Knut K. & Bjuland, Terje & Øksendal, Bernt, 2010. "Strategic Insider Trading Equilibrium: A Filter Theory Approach," Discussion Papers 2010/9, Department of Business and Management Science, Norwegian School of Economics.
  10. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
  11. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
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