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Informed Trading, Investment and Welfare

  • James Dow
  • Rohit Rahi

This paper studies the welfare economics of informed trading in a stock market. We model the effect of more informative prices on investment, given that this dependence will itself be reflected in equilibrium prices. We show that in rational expectations equilibrium with price-taking competitive behaviour, and in the presence of risk-neutral uninformed agents, uninformed traders cannot lose money on average to informed traders.

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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Archive Working Papers with number 029.

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Date of creation: Nov 1996
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Handle: RePEc:bbk:bbkifr:029
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