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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.

Suggested Citation

  • Alexander Zimper, 2013. "On the impossibility of insider trade in rational expectations equilibria," Working Papers 399, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:399
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    File URL: http://www.econrsa.org/node/817
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    References listed on IDEAS

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    4. Robert J. Aumann, 1998. "Common Priors: A Reply to Gul," Econometrica, Econometric Society, vol. 66(4), pages 929-938, July.
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    6. Adam Dominiak & Jean-Philippe Lefort, 2013. "Agreement theorem for neo-additive beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 1-13, January.
    7. Alexander Zimper, 2013. "Speculative Trade Equilibria with Incorrect Price Anticipations," Working Papers 201335, University of Pretoria, Department of Economics.
    8. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    9. Wakker,Peter P., 2010. "Prospect Theory," Cambridge Books, Cambridge University Press, number 9780521765015, March.
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    More about this item

    Keywords

    Levin-Coburn Report; Goldman Sach; Insider Trade; Rational Expectations;

    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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