Insider Trading, Investment and Liquidity: A Welfare Analysis

28 Pages Posted: 8 Jun 2000

See all articles by Sudipto Bhattacharya

Sudipto Bhattacharya

London School of Economics; Centre for Economic Policy Research (CEPR)

Giovanna Nicodano

Collegio Carlo Alberto, Università di Torino; University of Turin - Department ESOMAS; Collegio Carlo Alberto

Date Written: October 1999

Abstract

We compare competitive equilibrium outcomes with and without trading by an informed insider, in a model with ex ante aggregate investment choices which can not respond to any enhanced informational content of interim asset prices associated with insider trading. Noise trading is generated by aggregate uncertainty regarding other agents' intertemporal consumption preferences. Since all agents, and noise traders in particular, have well-specified preferences, the welfare implications of insider trading for outsiders can be analyzed. Moreover, the allocation without the insider trading is not assumed to be ex ante (constrained) Pareto efficient, since we depart from the standard setup with negative exponential utility and normal returns. Our welfare analysis uncovers the potentially beneficial role of interim information revelation arising from insider trading, in improving the risk-sharing among outsiders with stochastic liquidity needs.

JEL Classification: D52, D82, G14

Suggested Citation

Bhattacharya, Sudipto and Nicodano, Giovanna, Insider Trading, Investment and Liquidity: A Welfare Analysis (October 1999). Available at SSRN: https://ssrn.com/abstract=221688 or http://dx.doi.org/10.2139/ssrn.221688

Sudipto Bhattacharya

London School of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
44 171 955 7320 (Phone)
44 171 955 7420 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giovanna Nicodano (Contact Author)

Collegio Carlo Alberto, Università di Torino ( email )

Piazza Arbarello 8
Torino, 10122
Italy

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

University of Turin - Department ESOMAS ( email )

Turin, 10134
Italy

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano/

Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10121
Italy
390116705006 (Phone)

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

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