Insider trading, investment and liquidity: a welfare analysis

Bhattacharya, Sudipto and Nicodano, Giovanna (1999) Insider trading, investment and liquidity: a welfare analysis. Financial Markets Group Discussion Papers (334). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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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.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 1999 The Author(s)
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited:	29 Jun 2023 11:39
Last Modified:	14 Sep 2024 04:33
URI:	http://eprints.lse.ac.uk/id/eprint/119114

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