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

Abstract

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

Dumitrescu, Ariadna, Imperfect Competition and Market Liquidity with a Supply Informed Trader (February 2005). UFAE and IAE Working Papers No. 591.03. Available at SSRN: https://ssrn.com/abstract=672223 or http://dx.doi.org/10.2139/ssrn.672223

Ariadna Dumitrescu (Contact Author)

ESADE Business School ( email )

Av. Pedralbes 60-62
Barcelona, 08034
Spain

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