Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jul, 2016, Volume 84, Issue 4

Insider Trading, Stochastic Liquidity, and Equilibrium Prices
p. 1441-1475

Pierre Collin‐Dufresne, Vyacheslav Fos

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.

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Supplement to "Insider Trading, Stochastic Liquidity and Equilibrium Prices"

This appendix contains material not found within the manuscript.

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