Risk aversion,public disclosure,and partially informed outsiders |
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Affiliation: | 1. Department of Financial Engineering and Actuarial Mathematics, Soochow University, Taipei 10048, Taiwan;2. College of Management, Yuan Ze University, Taoyuan 32003, Taiwan;3. Department of Quantitative Finance, National Tsing Hua University, Hsinchu 30010, Taiwan;1. School of Mathematical Sciences, University of Jinan, China;2. SHU-UTS SILC Business School, Shanghai University, China;1. School of Securities and Futures, Southwestern University of Finance and Economics, China;2. Department of Finance, National Central University, No. 300, Jhongda Rd., Jhongli City, Taoyuan County 32001, Taiwan, ROC;3. School of Securities and Futures, Southwestern University of Finance and Economics, No. 55, Guanghuacun Street, Chengdu, Sichuan 610074, China;1. School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan, PR China;2. School of Economics and Management, Southwest Jiaotong University, Chengdu, Sichuan, PR China;1. Department of Mathematics and Natural Sciences, Gulf University for Science and Technology, Kuwait;2. Department of Economics, University of Virginia, Charlottesville, VA 22903, USA;3. Souk El Gharb, Lebanon |
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Abstract: | In this paper, we examine the impact of public disclosure and partially informed outsiders on a risk-averse insider’s trading behavior, market efficiency, and market depth. In our model, under disclosure requirements, except for the final auction, market depth is the same at every auction. When informed outsiders are risk-neutral, in contrast to the case of a risk-averse insider with no informed outsiders, the insider is more concerned about the uncertainty about future price risk. When the number of informed outsiders increases, market liquidity improves, and the insider increases the variance of her random component to conceal her trading strategy. However, since the insider is relatively more risk-averse, she pays less attention to doing this on her own. Besides, the order flow provided by informed outsiders and randomly added by the insider injects additional liquidity into the market. When informed outsiders are risk-averse, compared to risk-neutral informed outsiders, an insider is most concerned about trading risks brought by informed outsiders at the beginning of trading. Furthermore, whether the trader is an insider or informed outsider, the more risk-averse trader has lower expected profits. Moreover, outsiders’ greater risk aversion leads to a smaller market depth. |
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Keywords: | Insider trading Risk aversion Public disclosure Outsider learning Liquidity |
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