Scandinavian Working Papers in Economics
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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business 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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