Insider and Liquidity Trading in Stock and Options Markets

Bruno Biais and Pierre Hillion

The Review of Financial Studies, 1994, vol. 7, issue 4, 743-80

Abstract: We analyze the introduction of a nonredundant option, which completes the markets, and the effects of this on information revelation and risk sharing. The option alters the interaction between liquidity and insider trading. We find that the option mitigates the market breakdown problem created by the combination of market incompleteness and asymmetric information. The introduction of the option has ambiguous consequences on the informational efficiency of the market. One the one hand, by avoiding market breakdown, it enables trades to occur and convey information. On the other hand, the introduction of the option enlarges the set of trading strategies the insider can follow. This can make it more difficult for the market makers to interpret the information content of trades and consequently can reduce the informational efficiency of the market. The introduction of the option also has an ambiguous effect on the profitability of insider trades, which can either increase or decrease depending on parameter values. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1994
References: Add references at CitEc
Citations: View citations in EconPapers (101)

Downloads: (external link)
http://www.jstor.org/fcgi-bin/jstor/listjournal.fcg/08939454 full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:7:y:1994:i:4:p:743-80

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().