Imperfect Competition and Market Liquidity with a Supply Informed Trader

Ariadna Dumitrescu ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

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 supply informed trader plays a dual role in market making and in information revelation. This trader not only reveals a part of the information he owns, but he also induces the other traders to reveal more of their private information. The presence of different types of information decreases market liquidity and induces non-monotonicity of the market indicators with respect to the variance of liquidation value. Replacing the noise introduced by liquidity traders with a random supply also allows us to study the effect the shocks on different components of supply have on prices and quantities.

Keywords: insider trading; imperfect competition; market liquidity (search for similar items in EconPapers)
JEL-codes: D82 G12 G14 (search for similar items in EconPapers)
Pages: 44
Date: 2003-10-08
New Economics Papers: this item is included in nep-cfn and nep-fin
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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:591.03

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