Overconfidence and insider trading with correlated signals

Abstract

This study extends the framework of Jain and Mirman (1999) model to the case of overconfident market makers à la Zhou (2011). We characterize the linear equilibrium outcomes and derive explicit formulas for the model parameters. A comparative statics analysis is then conducted with respect to the Jain and Mirman (1999) and Zhou (2011) models.

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  Insider trading volume is independent of the level of overconfidence.
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  Key equilibrium outcomes depend on the variances of the underlying variables and the degree of overconfidence.