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Imperfect Competition among Informed Traders

Authors

  • Kerry Back,

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    • Back is at Olin School of Business, Washington University in St. Louis. Cao is at Haas School of Business, University of California at Berkeley. Willard is at Sloan School of Management, M.I.T. We thank Sandy Grossman, S. Viswanathan, two anonymous referees, and the editor, René Stulz, for helpful comments.
  • C. Henry Cao,

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    • Back is at Olin School of Business, Washington University in St. Louis. Cao is at Haas School of Business, University of California at Berkeley. Willard is at Sloan School of Management, M.I.T. We thank Sandy Grossman, S. Viswanathan, two anonymous referees, and the editor, René Stulz, for helpful comments.
  • Gregory A. Willard

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    • Back is at Olin School of Business, Washington University in St. Louis. Cao is at Haas School of Business, University of California at Berkeley. Willard is at Sloan School of Management, M.I.T. We thank Sandy Grossman, S. Viswanathan, two anonymous referees, and the editor, René Stulz, for helpful comments.

Abstract

We analyze competition among informed traders in the continuous-time Kyle(1985) model, as Foster and Viswanathan (1996) do in discrete time. We explicitly describe the unique linear equilibrium when signals are imperfectly correlated and confirm the conjecture of Holden and Subrahmanyam (1992) that there is no linear equilibrium when signals are perfectly correlated. One result is that at some date, and at all dates thereafter, the market would have been more informationally efficient had there been a monopolist informed trader instead of competing traders. The relatively large amount of private information remaining near the end of trading causes the market to approach complete illiquidity.

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