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RFS Advance Access originally published online on July 27, 2006
Review of Financial Studies 2008 21(5):2275-2306; doi:10.1093/rfs/hhl029
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org.

Strong-Form Efficiency with Monopolistic Insiders

Minh Chau
ESSEC Business School

Dimitri Vayanos
London School of Economics, CEPR, and NBER

Address correspondence to Dimitri Vayanos, Department of Accounting and Finance, London School of Economics, Houghton Street, London WC2A 2AE, UK, or e-mail: d.vayanos{at}lse.ac.uk.

JEL Classification: D82, G14


  Abstract

We study market efficiency in an infinite-horizon model with a monopolistic insider. The insider can trade with competitive market makers and noise traders, and observes privately the expected growth rate of asset dividends. In the absence of the insider, this information would be reflected in prices only after a long series of dividend observations. Thus, the insider’s information is "long-lived." Surprisingly, however, the monopolistic insider chooses to reveal her information very quickly, within a time converging to zero as the market approaches continuous trading. Although the market converges to strong-form efficiency, the insider’s profits do not converge to zero.

We thank Bruno Biais, Andrew Ellul, Denis Gromb, Harrison Hong, Jonathan Lewellen, Maureen O’Hara, Andrew Patton, Anna Pavlova, Michela Verardo, Jiang Wang, Jean-Pierre Zigrand, an anonymous referee, and seminar participants at AFFI, EFA, ESSEC, and HEC for helpful comments and suggestions. A previous version of this article was circulated under the title "Positive Profits when Prices are Strongly Efficient."


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