Front-running by Mutual Fund Managers: It ain't that Bad

Jean-Pierre Danthine and Serge X Moresi

No 1528, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper evaluates the welfare implications of front-running by mutual fund managers. It extends the model of Kyle (1985) to a situation in which the insider with fundamentals-information competes against an insider with trade-information and in which noise trading is endogenized. Noise traders are small investors trading through mutual funds to hedge non-tradable or illiquid assets. The insider with trade-information is one of the fund managers. We find that front-running activity reduces their customers’ liquidity costs, but it also reduces their hedging benefits. As a result, the customers of the front-running manager may be worse off and place smaller orders. The opposite is true, for those investors who are not subject to front-running, however. In aggregate, front-running will either have no effect, or have a positive effect on welfare.

Keywords: Front-running; Insider Trading; Noise Trading (search for similar items in EconPapers)
JEL-codes: G14 G23 (search for similar items in EconPapers)
Date: 1996-12
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Related works:
Working Paper: Front-Running by Mutual Fund Managers: It Ain't That bad (1996)
Working Paper: Front-Running by Mutual Fund Managers: It Ain't That Bad (1996)
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