Spring 2007 Seminar Series

DATE: Thursday, February 15, 2007
LOCATION: E40-298
TIME: 4:15pm
Reception immediately following in the Philip M. Morse Reading Room, E40-106

SPEAKER:
Rene Caldentey

TITLE
Insider Trading with Stochastic Valuation

ABSTRACT
This paper studies a model of strategic trading with asymmetric information of an asset whose value follows a Brownian motion. An insider continuously observes a signal that tracks the evolution of the asset fundamental value. At a random time a public announcement reveals the current value of the asset to all the traders. The equilibrium has two regimes separated by an endogenously determined time T. In [0,T) , the insider gradually transfers her information to the market and the market's uncertainty about the value of the asset decreases monotonically. By time T all her information is transferred to the market and the price agrees with the market value of the asset. In the interval [T, infinity), the insider trades large volumes and reveals her information immediately, so market prices track the market value perfectly. Despite this market efficiency, we show that the insider is still able to collect strictly positive rents after T.