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Partially informed noise traders

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Abstract

The single auction equilibrium of Kyle’s (1985) is studied, in which noise traders may be partially informed, or alternatively they can be manipulated. Unlike Kyle’s assumption that the quantity traded by the noise traders is independent of the asset value, we assume that the noise traders are able to correlate their trade with the true price. This has several implications for the equilibrium, one being that the informed trader’s expected profits decrease as the noise traders’ ability to correlate positively improve. In the limit, the noise traders do not lose on average, and the informed trader makes zero expected profits. When the correlation is negative, we interpret this as manipulation. In this case the insider makes the highest expected profits, and the informativeness of prices is at its minimum.

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Authors and Affiliations

  1. Norwegian School of Economics and Business Administration (NHH), 5045, Bergen, Norway

    Knut K. Aase, Terje Bjuland & Bernt Øksendal

  2. Centre of Mathematics for Applications (CMA), University of Oslo, Oslo, Norway

    Knut K. Aase & Bernt Øksendal

Authors
  1. Knut K. Aase
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  2. Terje Bjuland
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  3. Bernt Øksendal
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Correspondence to Bernt Øksendal.

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Aase, K.K., Bjuland, T. & Øksendal, B. Partially informed noise traders. Math Finan Econ 6, 93–104 (2012). https://doi.org/10.1007/s11579-012-0075-4

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  • DOI: https://doi.org/10.1007/s11579-012-0075-4

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