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On the impossibility of insider trade in rational expectations equilibria

Existing no trade results are based on the common prior assumption (CPA). This paper identifies a strictly weaker condition than the CPA under which speculative trade is impossible in a rational expectations equilibrium (REE). As our main finding, we demonstrate the impossibility of speculative asset trade in an REE whenever an insider is involved who knows the asset’s true value. To model insider trade as an equilibrium phenomenon an alternative equilibrium concept than the REE is thus required.

Working paper 399
1 December 2013
Related Journal

North American Journal of Economics and Finance
1 April 2014
SHARE THIS Working Paper PUBLICATION:
12 December 2013
Publication Type: Working Paper
JEL Code: D51, D53, G02