Optimal Noise in Asset-Price Manipulation

Abstract

I study the optimal behavior of an insider who can manipulate asset prices by releasing private information to uninformed investors. The previous literature argues that without restrictive assumptions, informationbased manipulation is not sustainable in the long run. I show that, by allowing the signal space to be continuous, long-run manipulation can easily exist under general assumptions. If the uninformed investors are boundedly rational, the insider has an even greater ability to manipulate prices.