Insider Trading with Partially Informed Traders

17 Pages Posted: 15 Nov 2011

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Terje Bjuland

Norwegian School of Economics (NHH) - Department of Finance

Bernt Oksendal

University of Oslo - Department of Mathematics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: November 15, 2011

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

JEL Classification: G00

Suggested Citation

Aase, Knut K. and Bjuland, Terje and Oksendal, Bernt, Insider Trading with Partially Informed Traders (November 15, 2011). NHH Dept. of Finance & Management Science Discussion Paper No. 2011/21. Available at SSRN: https://ssrn.com/abstract=1959836 or http://dx.doi.org/10.2139/ssrn.1959836

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Terje Bjuland

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Bernt Oksendal

University of Oslo - Department of Mathematics ( email )

P.O. Box 1053
Blindern, N-0162, Os
Norway
+47-2285 5913 (Phone)
+47-2285 4349 (Fax)

Norwegian School of Economics (NHH) - Department of Finance

Helleveien 30
N-5045 Bergen
Norway

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