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Competition in the stock market with asymmetric information

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  • Wang, Kun Tracy
  • Wang, Wanbin Walter
Abstract
We build a game theoretical model to examine how the level of information advantage of insiders and the competition between insiders and sophisticated investors affect stock price movements and traders’ trading strategies and profits. We show that the competition between insiders and sophisticated investors can reduce the losses of less sophisticated investors, and thus alleviates the disadvantaged position of the less sophisticated investors. Further, traders’ profits are affected by the accuracy of insiders’ private information, and the number of days that insiders have obtained the information in advance. These findings show the importance of information transparency and the role of sophisticated investors in limiting insiders’ trading advantages and mitigating the expropriation of investors by insiders.

Suggested Citation

  • Wang, Kun Tracy & Wang, Wanbin Walter, 2017. "Competition in the stock market with asymmetric information," Economic Modelling, Elsevier, vol. 61(C), pages 40-49.
    • Handle: RePEc:eee:ecmode:v:61:y:2017:i:c:p:40-49
    DOI: 10.1016/j.econmod.2016.11.024
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    2. Wilson, Mark & Wang, Kun Tracy & Wu, Yue & Lau, Archie, 2022. "Institutional investors and earnings management associated with controlling shareholders' promises: Evidence from the split share structure reform in China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(3).
    3. Rojas-de-Gracia, María-Mercedes & Casado-Molina, Ana-María & Alarcón-Urbistondo, Pilar, 2021. "Relationship between reputational aspects of companies and their share price in the online environment," Technology in Society, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Asymmetric information; Inside trading; Trading strategies; Trading profit; Nash equilibrium; Price movement;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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