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Insider Trading, Stochastic Liquidity and Equilibrium Prices / Pierre Collin-Dufresne, Vyacheslav Fos.
- Format:
- Book
- Author/Creator:
- Collin-Dufresne, Pierre.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w18451.
- NBER working paper series no. w18451
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2012.
- Summary:
- We extend Kyle's (1985) model of insider trading to the case where liquidity provided by noise traders follows a general stochastic process. Even though the level of noise trading volatility is observable, in equilibrium, measured price impact is stochastic. If noise trading volatility is mean-reverting, then the equilibrium price follows a multivariate 'stochastic bridge' process, which displays stochastic volatility. This is because insiders choose to optimally wait to trade more aggressively when noise trading activity is higher. In equilibrium, market makers anticipate this, and adjust prices accordingly. More private information is revealed when volatility is higher. In time series, insiders trade more aggressively, when measured price impact is lower. Therefore, execution costs to uninformed traders can be higher when price impact is lower.
- Notes:
- Print version record
- October 2012.
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