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Continuous Auctions and Insider Trading

Albert S. Kyle
Econometrica
Vol. 53, No. 6 (Nov., 1985), pp. 1315-1335
Published by: The Econometric Society
DOI: 10.2307/1913210
Stable URL: http://www.jstor.org/stable/1913210
Page Count: 21
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Continuous Auctions and Insider Trading
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Abstract

A dynamic model of insider trading with sequential auctions, structured to resemble a sequential equilibrium, is used to examine the informational content of prices, the liquidity characteristics of a speculative market, and the value of private information to an insider. The model has three kinds of traders: a single risk neutral insider, random noise traders, and competitive risk neutral market makers. The insider makes positive profits by exploiting his monopoly power optimally in a dynamic context, where noise trading provides camouflage which conceals his trading from market makers. As the time interval between auctions goes to zero, a limiting model of continuous trading is obtained. In this equilibrium, prices follow Brownian motion, the depth of the market is constant over time, and all private information is incorporated into prices by the end of trading.

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