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research article

Insider Trading, Stochastic Liquidity, And Equilibrium Prices

Collin-Dufresne, Pierre  
•
Fos, Vyacheslav
2016
Econometrica

We extend Kyle's (1985) model of insider trading to the case where noise trading volatility follows a general stochastic process. We determine conditions under which, in equilibrium, price impact and price volatility are both stochastic, driven by shocks to uninformed volume even though the fundamental value is constant. The volatility of price volatility appears 'excessive' because insiders choose to trade more aggressively (and thus more information is revealed) when uninformed volume is higher and price impact is lower. This generates a positive relation between price volatility and trading volume, giving rise to an endogenous subordinate stochastic process for prices.

  • Details
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Type
research article
DOI
10.3982/Ecta10789
Web of Science ID

WOS:000380136000004

Author(s)
Collin-Dufresne, Pierre  
Fos, Vyacheslav
Date Issued

2016

Publisher

Wiley-Blackwell

Published in
Econometrica
Volume

84

Issue

4

Start page

1441

End page

1475

Subjects

Kyle model

•

insider trading

•

asymmetric information

•

liquidity

•

price impact

•

market depth

•

stochastic volatility

•

volume

•

subordinate process

•

execution costs

•

continuous time

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-PCD  
Available on Infoscience
October 18, 2016
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/129872
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