Insider Trading and Sentiment Trading

38 Pages Posted: 18 Sep 2015

See all articles by Karl Ludwig Keiber

Karl Ludwig Keiber

European University Viadrina Frankfurt (Oder) - Department of Economics

Date Written: September 17, 2015

Abstract

This paper studies strategic insider trading in continuous time when sentiment traders are present in the securities market. In equilibrium, we characterize both the insider's trading strategy and the market maker's pricing rule. We find that both the insider's trading aggressiveness and the insider's unconditional expected profits are decreasing in the informational content of sentiment trading. The impact of the sentiment traders' trading activity is reported to be non-monotonic. We identify securities markets in which the sentiment traders' trading activity increases or decreases both the insider's trading aggressiveness and the insider's expected profits, respectively. The securities market's liquidity is found to be independent of the informativeness of sentiment trading. But, the depth of the securities market increases in the sentiment traders' trading activity. Finally, sentiment trading does not affect the price discovery process adversely. We conclude that sentiment trading does not impose any negative externality to the securities market at all. Caring about market quality, regulators should not be worried about sentiment trading at all.

Keywords: Insider trading, sentiment trading, liquidity, price discovery, market microstructure, behavioral finance.

JEL Classification: G14, D82

Suggested Citation

Keiber, Karl Ludwig, Insider Trading and Sentiment Trading (September 17, 2015). Available at SSRN: https://ssrn.com/abstract=2661994 or http://dx.doi.org/10.2139/ssrn.2661994

Karl Ludwig Keiber (Contact Author)

European University Viadrina Frankfurt (Oder) - Department of Economics ( email )

Grosse Scharrnstr. 59
D-15230 Frankfurt (Oder)
Germany
+49-335-55342985 (Phone)
+49-335-55342357 (Fax)

HOME PAGE: http://www.wiwi.euv-frankfurt-o.de/keiber

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