Imperfect Competition and Market Liquidity with a Supply Informed Trader
UFAE and IAE Working Papers No. 591.03
41 Pages Posted: 26 Feb 2005
Date Written: February 2005
We develop a model of insider trading where agents have private information either about liquidation value or about supply, and behave strategically to maximize their profits. The presence of a supply-informed trader in the market induces non-monotonicity of market indicators with respect to the variance of liquidation value. Moreover, the existence of private information about supply affects significantly market performance as it induces, among other effects, lower market liquidity. Finally, our model suggests another link between Kyle's (1985, 1989) and Glosten and Milgrom's (1985) models by allowing for strategic behavior of an informed dealer.
Keywords: Insider trading, Imperfect competition, Market liquidity
JEL Classification: D82, G12, G14
Suggested Citation: Suggested Citation