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No Trade, Informed Trading, and Accuracy of Information

Author

Listed:
  • Shino Takayama

    (University of Queensland)

  • Jayanaka Wijeratne

    (University of Queensland Alumnus)

Abstract

We present a model in which there is uncertainty about realization of a risky asset value for an informed trader. We introduce two states such that in the "narrow" state the informed trader has better information than in the "wide" state. Then, we show that the informed trader in the wide state does not trade in equilibrium if the information that the informed trader with better information has is sufficiently accurate and the probability of the narrow state is sufficiently high. We use the framework presented by Glosten and Milgrom (1985) and extend the assumption that the informed trader knows the terminal value of the risky asset. Finally, we obtain the conditions under which the informed trader would not trade in equilibrium.

Suggested Citation

  • Shino Takayama & Jayanaka Wijeratne, 2011. "No Trade, Informed Trading, and Accuracy of Information," Economics Bulletin, AccessEcon, vol. 31(2), pages 1313-1321.
    • Handle: RePEc:ebl:ecbull:eb-10-00534
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    References listed on IDEAS

    as
    1. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-651.
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    More about this item

    Keywords

    Market microstructure; Glosten-Milgrom; Price formation; Asymmetric information; Bid-ask spreads.;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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