Insider trading with partially informed traders
AbstractThe 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 InfoPaper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2011/21.
Length: 16 pages
Date of creation: 15 Nov 2011
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Insider trading; asymmetric information; strategic trade; correlated trade; partially informed noise traders;
Find related papers by JEL classification:
- G00 - Financial Economics - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-21 (All new papers)
- NEP-CTA-2011-11-21 (Contract Theory & Applications)
- NEP-MST-2011-11-21 (Market Microstructure)
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