Impact of heterogenous prior beliefs and disclosed insider trades

TL;DR

This paper develops a multi-period trading model incorporating heterogeneous prior beliefs and mandatory trade disclosures, revealing how irrational insiders camouflage trades, affecting market depth and profitability over time.

Contribution

It introduces a novel model combining asymmetric information, heterogenous beliefs, and trade disclosure, analyzing their joint impact on insider trading strategies and market outcomes.

Findings

Insider trades are camouflaged with noise, revealing private info gradually.

Heterogeneous beliefs influence trade intensity and are inversely related to asymmetric information.

Trade disclosure leads to more aggressive insider trading, reducing market depth and causing profit fluctuations.

Abstract

In this paper, we present a multi-period trading model by assuming that traders face not only asymmetric information but also heterogenous prior beliefs, under the requirement that the insider publicly disclose his stock trades after the fact. We show that there is an equilibrium in which the irrational insider camouflages his trades with a noise component so that his private information is revealed slowly and linearly whenever he is overconfident or underconfident. We also investigate the relationship between the heterogeneous beliefs and the trade intensity in the presence of trade disclosure, and show that the weights on asymmetric information and heterogeneous prior beliefs are opposite in sign and they change alternatively in the next period. Under the requirement of disclosure, the irrational insider trades more aggressively and leads to smaller market depth. Moreover, the co-existence of "public disclosure requirement" and "heterogeneous prior beliefs" leads to the fluctuant multi-period expected profits and a larger total expected trading volume which is positively related to the degree of heterogeneity. More importantly, even public disclosure may lead to negative profits of the irrational insider's in some periods, inside trading remains profitable from the whole trading period.