Insider Trading and Speed of Information Dissemination

39 Pages Posted: 11 Jan 2019

See all articles by Mohammadreza Bolandnazar

Mohammadreza Bolandnazar

Columbia University - Columbia Business School

Date Written: March 1, 2018

Abstract

I extend the Kyle (1985) model of strategic trading to a case in which the public announcement arrives at a random time. The insider does not perfectly observe the true value of the security, but he continues to hone his knowledge by using private source of information. Two types of equilibrium emerges from this model. In one type, the insider chooses a deterministic stopping time T, before which he trades smoothly like in a Kyle model with known terminal time. By time T, the insider has revealed all his private information and the market price is at its full efficiency. After this time, by trading in large volumes, the insider uses his incoming new information to continually wash out the mispricings caused by uninformed traders, an as a consequence keeps the prices efficient. If he does not expect to have enough time before the public announcement, or if his initial private information about the asset value is precise enough, the second type of equilibrium emerges. In this type, the insider trades excessively patiently and the market efficiency is reached only asymptotically.

Keywords: Information and Market Efficiency, Insider Trading, Trading Volume

JEL Classification: G14, G12

Suggested Citation

Bolandnazar, Mohammadreza, Insider Trading and Speed of Information Dissemination (March 1, 2018). Columbia Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3308821 or http://dx.doi.org/10.2139/ssrn.3308821

Mohammadreza Bolandnazar (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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