Abstract

We consider an extension of the Kyle (1985) setting where Arrow-Debreu securities are traded and the informed trader has private information regarding arbitrary higher moments of the asset payoff distribution.In this setting we analyze price discovery and informed demand of Arrow-Debreu securities---equivalently, options. Our model admits a simple equilibrium solution. The informed trader strategy in our model is consistent with options trading strategies used to trade on higher moments in practice. We find that information efficiency of Arrow-Debreu prices decreases with respect to the dispersion of the informed trader's private signals.

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