Insider Trading With Stochastic Valuation

43 Pages Posted: 16 May 2007

See all articles by Rene Caldentey

Rene Caldentey

University of Chicago - Booth School of Business

Ennio Stacchetti

Leonard N. Stern School of Business - Department of Economics

Date Written: May 14, 2007

Abstract

This paper studies a model of strategic trading with asymmetric information of an asset whose value follows a Brownian motion. An insider continuously observes a signal that tracks the evolution of the asset fundamental value. At a random time a public announcement reveals the current value of the asset to all the traders. The equilibrium has two regimes separated by an endogenously determined time T. In [0,T), the insider gradually transfers her information to the market and the market's uncertainty about the value of the asset decreases monotonically. By time T all her information is transferred to the market and the price agrees with the market value of the asset. After T, the insider trades large volumes and reveals her information immediately, so market prices track the market value perfectly. Despite this market efficiency, the insider is able to collect strictly positive rents after T.

Suggested Citation

Caldentey, Rene and Stacchetti, Ennio S., Insider Trading With Stochastic Valuation (May 14, 2007). Available at SSRN: https://ssrn.com/abstract=986405 or http://dx.doi.org/10.2139/ssrn.986405

Rene Caldentey

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.chicagobooth.edu/faculty/directory/c/rene-caldentey

Ennio S. Stacchetti (Contact Author)

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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