Insider trading, overconfidence, and private information flow

Abstract

In this study, we investigate a dynamic model wherein an overconfident and a risk-neutral informed trader optimally exploit their long-lived private information regarding the value of an asset. We find that when the degree of overconfidence becomes larger, or the intensity of private information flow becomes larger relative to the initial private signal, the market becomes more stable. Additionally, we find that the greater the intensity of private information flow relative to the initial private signal, the more evident the patient transaction and the slower the information is incorporated in the price.