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Profitable Informed Trading in a Simple General Equilibrium Model of Asset Pricing

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  • James Dow
  • Gary Gorton

Abstract

This paper presents a simple general equilibrium model of asset pricing in which profitable informed trading can occur without any "noise" added to the model. It shows that models of profitable informed trading must restrict the portfolio choices of uninformed traders: in particular, they cannot buy the market portfolio. In this model, profitable informed trading lowers the welfare of all agents when compared across steady states.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4315.

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Date of creation: Apr 1993
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Publication status: published as Journal of Economic Theory, Vol. 67, no. 2 (December 1995): 327-369.
Handle: RePEc:nbr:nberwo:4315

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Cited by:
  1. Tille, Cédric & van Wincoop, Eric, 2008. "International Capital Flows under Dispersed Information: Theory and Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6989, C.E.P.R. Discussion Papers.
  2. Tille, Cédric & van Wincoop, Eric, 2014. "International capital flows under dispersed private information," Journal of International Economics, Elsevier, Elsevier, vol. 93(1), pages 31-49.
  3. Philip Bond & Hulya Eraslan, 2007. "Information-based trade," Levine's Bibliography 122247000000001689, UCLA Department of Economics.
  4. Dow, James & Gorton, Gary, 1997. " Stock Market Efficiency and Economic Efficiency: Is There a Connection?," Journal of Finance, American Finance Association, American Finance Association, vol. 52(3), pages 1087-1129, July.
  5. Mouselli, Sulaiman & Jaafar, Aziz & Goddard, John, 2013. "Accruals quality, stock returns and asset pricing: Evidence from the UK," International Review of Financial Analysis, Elsevier, Elsevier, vol. 30(C), pages 203-213.
  6. James Dow & Gary Gorton, . "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 19-94, Wharton School Rodney L. White Center for Financial Research.
  7. James Dow & Gary Gorton, 2006. "Noise Traders," NBER Working Papers 12256, National Bureau of Economic Research, Inc.
  8. Eric van Wincoop & Philippe Bacchetta, 2004. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," Econometric Society 2004 North American Winter Meetings, Econometric Society 628, Econometric Society.

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