No. 992 - Informed trading and stock market efficiency

The information content of stock prices is analysed without imposing strong restrictions on traders' preferences and the distribution of dividends. Noise in the information contained in equilibrium prices arises from endogenous asset supply, which offsets price movements due to informed trading. The informativeness of stock prices increases with the wealth of the informed traders and decreases with the risk-free rate, as stock prices respond more strongly to information held by informed traders when they take larger positions in stocks.