Profitable Informed Trading in a Simple General Equilibrium Model of Asset Pricing

61 Pages Posted: 10 Jul 2007 Last revised: 17 Oct 2022

See all articles by James Dow

James Dow

London Business School - Institute of Finance and Accounting

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: April 1993

Abstract

This paper presents a simple general equilibrium model of asset pricing in which profitable informed trading can occur without any "noise" added to the model. It shows that models of profitable informed trading must restrict the portfolio choices of uninformed traders: in particular, they cannot buy the market portfolio. In this model, profitable informed trading lowers the welfare of all agents when compared across steady states.

Suggested Citation

Dow, James and Gorton, Gary B., Profitable Informed Trading in a Simple General Equilibrium Model of Asset Pricing (April 1993). NBER Working Paper No. w4315, Available at SSRN: https://ssrn.com/abstract=478731

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Gary B. Gorton

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