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Strategic Insider Trading with Imperfect Information: A Trading Volume Analysis


  • Andrea Marcello Buffa

    () (University of Turin)


A model of insider trading is used to analyze the behaviour of trading volume in financial markets characterized by asymmetric information. This model extends the one in Bhattacharya and Nicodano (2001) by introducing competition among informed traders and imperfection of their private information. Contrary to the broad implications of adverse selection models and according to some empirical studies, this paper shows that trading volume is higher when the insiders are active in the market. A higher level of outsiders’ risky investment, due to an improved “risk sharing†among them, leads to a higher level of trading.

Suggested Citation

  • Andrea Marcello Buffa, 2004. "Strategic Insider Trading with Imperfect Information: A Trading Volume Analysis," Rivista di Politica Economica, SIPI Spa, vol. 94(6), pages 101-143, November-.
  • Handle: RePEc:rpo:ripoec:v:94:y:2004:i:6:p:101-143

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    References listed on IDEAS

    1. Sudipto Bhattacharya, 2001. "Insider Trading, Investment, and Liquidity: A Welfare Analysis," Journal of Finance, American Finance Association, vol. 56(3), pages 1141-1156, June.
    2. Cornell, Bradford & Sirri, Erik R, 1992. " The Reaction of Investors and Stock Prices to Insider Trading," Journal of Finance, American Finance Association, vol. 47(3), pages 1031-1059, July.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    4. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1994. " Trading Volume and Transaction Costs in Specialist Markets," Journal of Finance, American Finance Association, vol. 49(4), pages 1489-1505, September.
    5. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-887, August.
    6. Kerry Back & C. Henry Cao & Gregory A. Willard, 2000. "Imperfect Competition among Informed Traders," Journal of Finance, American Finance Association, vol. 55(5), pages 2117-2155, October.
    7. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    8. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    9. Fishe, Raymond P. H. & Robe, Michel A., 2004. "The impact of illegal insider trading in dealer and specialist markets: evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 71(3), pages 461-488, March.
    10. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games


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