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Informed Trading, Investment, and Welfare

Author

Listed:
  • Dow, J
  • Rahi, R

Abstract

This paper studies the welfare economics of informed trading in a stock market. We model the effect of more informative prices on investment, given that this dependence will itself be reflected in equilibrium prices. We show that in rational expectations equilibrium with price-taking competitive behaviour, and in the presence of risk-neutral uninformed agents, uninformed traders cannot lose money on average to informed traders.

Suggested Citation

  • Dow, J & Rahi, R, 1997. "Informed Trading, Investment, and Welfare," Economics Working Papers eco97/03, European University Institute.
    • Handle: RePEc:eui:euiwps:eco97/03
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    References listed on IDEAS

    as
    1. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
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    More about this item

    Keywords

    FINANCIAL MARKET ; INFORMATION ; GOVERNMENT POLICY ; REGULATION ; WELFARE ECONOMICS;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D60 - Microeconomics - - Welfare Economics - - - General

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