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On the impossibility of insider trade in rational expectations equilibria

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  • Alexander Zimper

Abstract

Existing no trade results are based on the common prior assumption (CPA). This paper identifies a strictly weaker condition than the CPA under which speculative trade is impossible in a rational expectations equilibrium (REE). As our main finding, we demonstrate the impossibility of speculative asset trade in an REE whenever an insider is involved who knows the asset's true value. To model insider trade as an equilibrium phenomenon an alternative equilibrium concept than the REE is thus required.
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Suggested Citation

  • Alexander Zimper, 2013. "On the impossibility of insider trade in rational expectations equilibria," ERSA Working Paper Series 399, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:399
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    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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