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Insider Trading, Investment and Liquidity: A Welfare Analysis

Listed author(s):
  • Giovanna Nicodano
  • Sudipto Bhattacharya

We compare competitive equilibrium outcomes with and without trading by a privately informed ¶monopolistic¶ insider, in a model with real investment portfolio choices ex ante, and noise trading generated by aggregate uncertainty regarding other agents intertemporal consumption preferences. The welfare implications of insider trading for the ex ante expected utilities of outsiders are analysed. The role of interim information revelation due to insider trading, in improving the risk-sharing among outsiders with stochastic liquidity needs, is examined in detail.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp334.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp334.

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Date of creation: Aug 1999
Handle: RePEc:fmg:fmgdps:dp334
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Dow, James & Rahi, Rohit, 2000. "Should Speculators Be Taxed?," The Journal of Business, University of Chicago Press, vol. 73(1), pages 89-107, January.
  2. 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.
  3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  4. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
  5. Repullo, Rafael, 1999. "Some Remarks on Leland's Model of Insider Trading," Economica, London School of Economics and Political Science, vol. 66(263), pages 359-374, August.
  6. Qi, Jianping, 1996. "Efficient investment and financial intermediation," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 891-900, June.
  7. Diamond, Douglas W & Verrecchia, Robert E, 1982. " Optimal Managerial Contracts and Equilibrium Security Prices," Journal of Finance, American Finance Association, vol. 37(2), pages 275-287, May.
  8. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
  9. 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.
  10. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  11. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
  12. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
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