Insider trading, investment and liquidity: a welfare analysis

Sudipto Bhattacharya and Giovanna Nicodano

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We compare equilibrium trading outcomes with and without participation by an informed insider, assuming inflexible ex ante aggregate investment choices by agents. Noise trading arises from aggregate uncertainty regarding other agents' intertemporal consumption preferences. The welfare levels of outsiders can thus be ascertained. The allocations without insider trading are not ex ante Pareto efficient, because our model differs from standard ones with negative exponential utility functions and normal returns. We characterize the circumstances under which the revelation of payoff-relevant information via prices-arising from insider trading- benefits outsiders with stochastic liquidity needs, by improving risk-sharing among them.

JEL-codes: G10 G14 (search for similar items in EconPapers)
Date: 1999-08-01
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http://eprints.lse.ac.uk/119114/ Open access version. (application/pdf)

Related works:
Journal Article: Insider Trading, Investment, and Liquidity: A Welfare Analysis (2001)
Working Paper: Insider Trading, Investment and Liquidity: A Welfare Analysis (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119114

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