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Can Inefficient Traders Create Value?

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  • C. N. V. Krishnan

Abstract

I examine the aggregate expected profit generated by informed traders of diverse ability in a competitive market. I assume that efficient traders get perfect information on asset values whereas inefficient traders get noisy information. In the presence of order size restrictions, I show that the aggregate expected profit generated by efficient and inefficient traders together can be higher than that generated by efficient traders alone. Thus, inefficient traders can create value in a constrained trading environment.

Suggested Citation

  • C. N. V. Krishnan, 2004. "Can Inefficient Traders Create Value?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(4), pages 461-479, December.
    • Handle: RePEc:bla:jfnres:v:27:y:2004:i:4:p:461-479
    DOI: 10.1111/j.1475-6803.2004.00103.x
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