Strategic Informed Trading and the Value of Private Information

Michail Anthropelos and Scott Robertson

Papers from arXiv.org

Abstract: We consider a market of risky financial assets whose participants are an informed trader, a representative uninformed trader, and noisy liquidity providers. We prove the existence of a market-clearing equilibrium when the insider internalizes her power to impact prices, but the uninformed trader takes prices as given. Compared to the associated competitive economy, in equilibrium the insider strategically reveals a noisier signal, and prices are less reactive to publicly available information. Additionally, and in direct contrast to the related literature, in equilibrium the insider's indirect utility monotonically increases in the signal precision. Therefore, the insider is motivated not only to obtain, but also to refine, her signal. Lastly, we show that compared to the competitive economy, the insider's internalization of price impact is utility improving for the uninformed trader, but somewhat surprisingly may be utility decreasing for the insider herself. This utility reduction occurs provided the insider is sufficiently risk averse compared to the uninformed trader, and provided the signal is of sufficiently low quality.

Date: 2024-04, Revised 2025-03
New Economics Papers: this item is included in nep-gth, nep-mic and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2404.08757 Latest version (application/pdf)

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:arx:papers:2404.08757

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().