Informed trading, investment, and welfare

Dow, James and Rahi, Rohit ORCID: 0000-0001-6887-9160 (2003) Informed trading, investment, and welfare. Journal of Business, 76 (3). 439 - 454. ISSN 0021-9398

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Abstract

This article studies the welfare economics of informed stock market trading. We analyze the effect of more informative prices on investment, given that this dependence will itself be reflected in equilibrium prices. While a higher incidence of informed speculation always increases firm value through a more informative trading process, the effect on agents’ welfare depends on how revelation of information changes risk‐sharing opportunities in the market. Greater revelation of information that agents wish to insure against reduces their hedging opportunities. On the other hand, early revelation of information that is uncorrelated with hedging needs allows agents to construct better hedges.

Item Type:	Article
Official URL:	http://www.journals.uchicago.edu/loi/jb
Additional Information:	© 2003 by The University of Chicago
Divisions:	Financial Markets Group Economics
Subjects:	H Social Sciences > HF Commerce
Date Deposited:	04 Apr 2008 10:14
Last Modified:	18 Nov 2024 23:51
URI:	http://eprints.lse.ac.uk/id/eprint/4104

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