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Information in Financial Markets

Paper Session

Sunday, Jan. 3, 2027 8:00 AM - 10:00 AM (EST)

Westin DC Downtown
Hosted By: American Finance Association
  • Chair: Cecilia Parlatore, New York University

Flexible Information Acquisition in the Kyle Model

S Viswanathan
,
Duke University
Hao Xing
,
Boston University

Abstract

"We study an information acquisition problem in which an informed trader acquires costly information prior to trading in the Kyle equilibrium. The cost of information acquisition is represented by an entropy cost. Both the prior distribution of the asset payoff and the signal distribution may be discrete or continuous, and need not be normal. The informed trader designs the optimal signal structure by balancing three forces: the profit potential from the informational advantage, the information leakage cost arising from market makers’ inference, and the cost of information acquisition.

We provide a complete characterization of the optimal information acquisition decision. Regardless of the prior distribution of the asset payoff, continuous signals are optimal. Moreover, any continuously distributed signal, together with an associated logit-type posterior distribution of the payoff, yields the same ex-ante value for the informed trader, the same conditional expected payoff given the signal, and the same unconditional distribution of the informed trader’s trading strategy. Consequently, a normally distributed signal can be adopted without loss of generality.

We further show that when the information acquisition cost increases or the volatility of noise trades decreases, the variance of the posterior expected payoff declines, the profit potential from trading diminishes, meanwhile the posterior expected payoff increasingly resembles a normal distribution, and the information leakage cost from trading decreases."

Kyle Meets Friedman: Informed Trading When Anticipating Future Information

Hongjun Yan
,
DePaul University
Liyan Yang
,
University of Toronto
Xueyong Zhang
,
Central University of Finance and Economics
Deqing Zhou
,
Central University of Finance and Economics

Abstract

"We analyze a dynamic model of an investor who receives private information on an
ongoing basis and faces post-trade disclosure each period. Characterizing the equilibrium
of this trading game between two players—the investor and a market maker—is
equivalent to solving a fictitious consumption–saving problem of one consumer facing
a borrowing constraint. Hence, insights from the consumption-saving literature, such
as the permanent income hypothesis, can be adapted to shed light on the informed
investor’s trading strategy, equilibrium asset prices, and market liquidity. Further
analysis suggests that these results arise because the informed investor’s commitment
value is zero."

Information Disclosure Frequency: Implications for Welfare and Cost of Capital

Wen Chen
,
Texas Tech University
Yajun Wang
,
CUNY-Baruch College

Abstract

We study how the frequency of information disclosure affects the cost of capital and traders' welfare under different market conditions. In competitive markets, gradual disclosure reduces uncertainty over time, enhances risk-sharing, and improves welfare for all traders. In non-competitive markets, where informed traders possess market power, increasing disclosure frequency reduces the initial cost of capital, as informed traders spread their trading over time. While more frequent disclosure continues to benefit uninformed traders, it may negatively impact informed traders, who trade based on both private information and liquidity shocks, as higher disclosure frequency increases the cumulative costs of hedging. Our findings suggest that firms may opt for less frequent disclosure when their decisions are influenced by institutional traders with monopoly power.

Discussant(s)
Savitar Sundaresan
,
Imperial College London
Jesse Davis
,
University of North Carolina-Chapel Hill
Ansgar Walther
,
University of Oxford
JEL Classifications
  • G1 - General Financial Markets