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Insider trading with partially informed traders

Author

Listed:
  • Aase, Knut K.

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Bjuland, Terje

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Øksendal, Bernt

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

The single auction equilibrium of Kyle's (1985) is studied, in which noise traders may be partially informed, or alternatively they can be manipulated. Unlike Kyle's assumption that the quantity traded by the noise traders is independent of the asset value, we assume that the noise traders are able to correlate their trade with the true price. This has several implications for the equilibrium, one being that the insider's expected profits decrease as the noise traders' ability to correlate positively improve. In the limit, the noise traders do not lose on average, and the insider makes zero expected profits. When the correlation is negative, we interpret this as manipulation. In this case the insider makes the highest expected profits, and the informativeness of prices is at its minimum.

Suggested Citation

  • Aase, Knut K. & Bjuland, Terje & Øksendal, Bernt, 2011. "Insider trading with partially informed traders," Discussion Papers 2011/21, Norwegian School of Economics, Department of Business and Management Science.
  • Handle: RePEc:hhs:nhhfms:2011_021
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    File URL: http://hdl.handle.net/11250/164186
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    References listed on IDEAS

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    4. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
    5. James Dow & Gary Gorton, 2006. "Noise Traders," NBER Working Papers 12256, National Bureau of Economic Research, Inc.
    6. Aase, Knut K. & Bjuland, Terje & Øksendal, Bernt, 2010. "Strategic Insider Trading Equilibrium: A Filter Theory Approach," Discussion Papers 2010/9, Norwegian School of Economics, Department of Business and Management Science.
    7. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    8. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    9. Aase, Knut K. & Bjuland, Terje & Øksendal, Bernt, 2010. "An anticipative linear filtering equation," Discussion Papers 2010/8, Norwegian School of Economics, Department of Business and Management Science.
    10. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    11. 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.
    12. Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
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    More about this item

    Keywords

    Insider trading; asymmetric information; strategic trade; correlated trade; partially informed noise traders;

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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