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Insider trading: regulation, risk reallocation, and welfare

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  • Estrada, Javier

Abstract

I argue in this paper that the imposition of insider trading regulations on a securities market generates not on1y a reallocation of wealth from insiders to liquidity traders, but also a reallocation of risk from the former to the latter. I further argue that, although the wealth reallocation has no impact on social welfare, under plausible assumptions, the risk reallocation imposes a cost on society.

Suggested Citation

  • Estrada, Javier, 1995. "Insider trading: regulation, risk reallocation, and welfare," UC3M Working papers. Economics 3900, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:3900
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    References listed on IDEAS

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    1. Bhattacharya, Utpal & Spiegel, Matthew, 1991. "Insiders, Outsiders, and Market Breakdowns," The Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 255-282.
    2. Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-1041, December.
    3. Subrahmanyam, Avanidhar, 1991. "Risk Aversion, Market Liquidity, and Price Efficiency," The Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 416-441.
    4. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-887, August.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    6. Michael J. Fishman & Kathleen M. Hagerty, 1992. "Insider Trading and the Efficiency of Stock Prices," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 106-122, Spring.
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