Time: Monday, 12/May/2025: 4:00pm - 5:30pm Session Chair: Jérôme Dugast |
Kyle Meets Friedman: Informed Trading When Anticipating Future Information
1DePaul University; 2University of Toronto, Canada; 3Central University of Finance and Economics
We analyze a model of a monopolistic informed investor who receives private information sequentially and faces a post-trading disclosure requirement. We show that this trading model can be transformed into a fictitious consumption-saving model with a borrowing constraint. Hence, insights from the consumption-saving literature can be adapted for the trading model. For example, analogous to the insights from the permanent income hypothesis, the informed investor ``saves'' more of his current information when expecting less future information advantage (``saving for rainy days'') or more uncertainty about it (``precautionary saving'') and smooths his information ``usage'' over time (``consumption smoothing'').
Competition and Collusion Among Strategic Traders Who Face Uncertainty
1University of Western Ontario, Ivey Business School; 2University of Michigan, Stephen M. Ross School of Business
Conventional wisdom holds that informed investors benefit from colluding in their trading. However, we show that this may not hold when investors face uncertainty about other traders’ behavior. In a Kyle (1985) framework, we compare trading profits under collusive and competitive equilibria when informed investors face uncertainty about liquidity trading volatility. While low uncertainty favors collusion, we show that the expected profit of an individual investor under competition can be higher than the total profits for all investors under collusion when uncertainty is sufficiently high. This finding cautions against relying solely on profits to detect collusive behavior.