Price discovery and gains from trade in asset markets with insider trading

Konferenzbeitrag

The present study contributes to the ongoing debate on possible costs and benefits of insider trading. We present a novel call auction model with insider information. Our model predicts that more insider information improves informational efficiency of prices, but this comes at the expense of reduced gains from trade. The model further implies that in the presence of insider information the call auction performs worse than continuous double auction. Testing these hypotheses in the lab we find that insider information increases informational efficiency of call auction prices but does not decrease the realized gains from trade. Contrary to the theoretical prediction, the call auction does not perform worse than the continuous double auction. In fact, when the probability of insider information is high, the call auction has the most informative prices and highest realized gains from trade. Our experiment provides new evidence, from markets with very asymmetrically dispersed information, that lends support to the decision by many stock exchanges to use call auctions when information asymmetries are severe and the need for accurate prices is large, e.g., at the open or close of the trading day.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2020: Gender Economics

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Design of Experiments: Laboratory, Group Behavior ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: call market ; call auction ; double auction ; asymmetric information ; experiment ; informational efficiency

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Brünner, Tobias ; Levinsky, Rene
• Event: Veröffentlichung
• (who): ZBW - Leibniz Information Centre for Economics
• (where): Kiel, Hamburg
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/224618
• Last update: 10.03.2025, 11:43 AM CET