Profitable Informed Trading in a Simple General Equilibrium Model of Asset Pricing
NBER Working Paper No. 4315
This paper presents a simple general equilibrium model of asset pricing in which profitable informed trading can occur without any "noise" added to the model. It shows 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.
Published: Journal of Economic Theory, Vol. 67, no. 2 (December 1995): 327-369.