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

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Author Info
James Dow
Gary Gorton

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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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Publisher 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 JET, Vol. 67, no. 2 (1995): 327-369.
Handle: RePEc:nbr:nberwo:4315

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

Cited by:
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  1. James Dow & Gary Gorton, 2006. "Noise Traders," NBER Working Papers 12256, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
    Other versions:
  3. James Dow & Gary Gorton, 1995. "Stock Market Efficiency and Economic Efficiency: Is There a Connection?," NBER Working Papers 5233, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Philip Bond & Hulya Eraslan, 2007. "Information-based trade," Levine's Bibliography 122247000000001689, UCLA Department of Economics. [Downloadable!]
  5. Antonio Bernardo & Kenneth Judd, 1997. "Efficiency of Asset Markets with Asymmetric Information," University of California at Los Angeles, Anderson Graduate School of Management 1130, Anderson Graduate School of Management, UCLA. [Downloadable!]
  6. James Dow & Gary Gorton, 1994. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Center for Financial Institutions Working Papers 95-10, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
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