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On the impossibility of insider trade in rational expectations equilibria

  • Alexander Zimper

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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File URL: http://www.econrsa.org/node/817
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Paper provided by Economic Research Southern Africa in its series Working Papers with number 399.

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Length: 18 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:rza:wpaper:399
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  1. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
  2. Dow, James & Werlang, Sérgio Ribeiro da Costa & Madrigal, Vicente, 1990. "Preferences, common knowledge and speculative trade," Economics Working Papers (Ensaios Economicos da EPGE) 149, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  3. Robert J. Aumann, 1998. "Common Priors: A Reply to Gul," Econometrica, Econometric Society, vol. 66(4), pages 929-938, July.
  4. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Batabyal, Amitrajeet A., 2012. "Project financing, entrepreneurial activity, and investment in the presence of asymmetric information," The North American Journal of Economics and Finance, Elsevier, vol. 23(1), pages 115-122.
  6. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
  7. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  8. Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc.
  9. Mohammed Abdellaoui & Aurelien Baillon & Laetitia Placido & Peter P. Wakker, 2011. "The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation," American Economic Review, American Economic Association, vol. 101(2), pages 695-723, April.
  10. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  11. Faruk Gul, 1998. "A Comment on Aumann's Bayesian View," Econometrica, Econometric Society, vol. 66(4), pages 923-928, July.
  12. Zimper, Alexander, 2009. "Half empty, half full and why we can agree to disagree forever," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 283-299, August.
  13. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
  14. Alexander Zimper, 2013. "Speculative Trade Equilibria with Incorrect Price Anticipations," Working Papers 201335, University of Pretoria, Department of Economics.
  15. Lefort, Jean-Philippe & Dominiak, Adam, 2013. "Agreement theorem for neo-additive beliefs," Economics Papers from University Paris Dauphine 123456789/7604, Paris Dauphine University.
  16. Adam Dominiak & Jean-Philippe Lefort, 2013. "Agreement theorem for neo-additive beliefs," Economic Theory, Springer, vol. 52(1), pages 1-13, January.
  17. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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