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Insider trading with partially informed traders

Aase, Knut K.; Bjuland, Terje; Øksendal, Bernt
Working paper
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URI
http://hdl.handle.net/11250/164185
Date
2011-11
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  • Discussion papers (FOR) [509]
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.
Publisher
Norwegian School of Economics. Department of Finance and Management Science
Series
Discussion paper;2011:21

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