Strategic competition between insiders with public information and overconfident market makers
Year: 2025
Type: article
Abstract: This paper fills a gap in the literature on overconfidence in financial markets by analyzing strategic competition among multiple perfectly and/or partially informed insiders facing overconfident market makers. While previous studies, such as [9] and [23], primarily examine the behavior of a single insider or asymmetries between informed and uninformed traders, our paper extends this line of inquiry by modeling a richer strategic environment. We develop two extensions of Zhou's framework [23]. In Model Ⅰ, we introduce Cournot competition among $N $ perfectly informed insiders, each possessing full knowledge of the asset's true value. In Model Ⅱ, we incorporate $M $ partially informed insiders. We characterize the Bayesian Nash equilibrium for each model in this paper and investigate how equilibrium outcomes—such as pricing rules, insiders' trading strategies, information revelation, and profit distribution—respond to variations in market structure and the level of overconfidence among market makers. Our comparative statics highlight the critical roles of competition and information asymmetry in shaping financial market dynamics.
Source: Journal of Dynamics and Games
DOI: 10.3934/jdg.2025034
Authors: Wassim Daher, Sadeq Damrah
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W4412036829