Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2011/21:
Insider trading with partially informed traders
Knut K. Aase ()
, Terje Bjuland ()
and Bernt Øksendal ()
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.
Keywords: Insider trading; asymmetric information; strategic trade; correlated trade; partially informed noise traders; (follow links to similar papers)
JEL-Codes: G00; (follow links to similar papers)
16 pages, November 15, 2011
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