Snowballing private information

Tomasz Sadzik and Chris Woolnough

Journal of Economic Theory, 2021, vol. 198, issue C

Abstract: We study informational efficiency in a model of strategic dynamic trade with a monopolistic informed trader. The informed trader continuously receives information about the growth rate of asset dividends and trades against market makers and liquidity traders. We show that when the private information is multi-dimensional, or growth rate of expected dividends is relatively high, private information snowballs over time and the informed trader reveals his information about the asset with delay. This contrasts with the informational efficiency of the workhorse model with one-dimensional information and no growth (see Chau and Vayanos (2008) and Caldentey and Stacchetti (2010)). We also show that the extent of the steady-state excess price volatility is linear in the market's variance about the value.

Keywords: Market microstructure; Insider trading; Multi-dimensional information; Excess volatility (search for similar items in EconPapers)
JEL-codes: D43 D84 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:198:y:2021:i:c:s0022053121001502

DOI: 10.1016/j.jet.2021.105333

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