1995/12/01 by James Dow, Gary Gorton, Gary B. Gorton · 48 citations
Economics, Econometrics and Finance · #Adverse selection #Asset (computer security) #Capital asset pricing model #Complex Systems and Time Series Analysis #Computer science #Economic theories and models #Economics #Financial Markets and Investment Strategies #Financial economics #General equilibrium theory #Microeconomics #Portfolio #Simple (philosophy)
paper · doi:10.1006/jeth.1995.1077
published in Journal of Economic Theory 67(2), 327-369 (Elsevier BV)
openalex publication_date 1995/12/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/23
We present a simple general equilibrium model of asset pricing in which profitable informed trading can occur without any "noise" added to the model. We use an equilibrium concept similar to rational expectations equilibrium, but which explicitly allows for the possibility of adverse selection. We show 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. Journal of Economic Literature Classification Numbers: G14, D50, D60, D82.