Research

Insider Trading and Communication among Peers

Abstract This paper investigates how insiders in financial markets might profit from sharing information with their peers. In order to analyze this question I develop a three period model based on the seminal Kyle (1985) paper on strategic insider trading, where in contrast to the previous literature, informed traders can share information about the fundamental value of the asset with their peers without disclosing it publicly to the whole market. I show that in such environment it can be ex-ante profitable for a trader to share some of its information with others. The intuition is the following: By sending information with some noise, the trader introduces noise into the economy and only he knows the precise realization of. This helps him to better interpret prices and he thus learns more about information of other traders compared to the market maker and thus makes a more profitable trade in the last period.

Sovereign Debt and CDS – A Welfare Analysis

I analyze a model of government borrowing, where the lender can insure himself against government default by signing a contract with a third party. Under quite general specifications I characterize the sub-game perfect equilibrium and compare it to the second-best and an economy where no such insurance is available. I find that under risk-neutrality of all parties the lender always chooses the efficient level of credit insurance and credit insurance is thus welfare improving compared to an economy without credit insurance. This is however no longer true in the case of risk-aversion of the government. I provide precise conditions under which an economy with credit insurance is strictly pareto-inferior compared to an economy without credit insurance.