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Strong-form efficiency with monopolistic insiders

By Minh Chau and Dimitri Vayanos

Abstract

We study market efficiency in an infinite-horizon model with a monopolistic insider. The insider can trade with competitive market makers and noise traders, and observes privately the expected growth rate of asset dividends. In the absence of the insider, this information would be reflected in prices only after a long series of dividend observations. Thus, the insider’s information is “long-lived.” Surprisingly, however, the monopolistic insider chooses to reveal her information very quickly, within a time converging to zero as the market approaches continuous trading. Although the market converges to strong-form efficiency, the insider’s profits do not converge to zero

Topics: HG Finance
Publisher: Oxford University Press
Year: 2008
DOI identifier: 10.1093/rfs
OAI identifier: oai:eprints.lse.ac.uk:29780
Provided by: LSE Research Online
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