5. Conclusion
In this paper, we find that part (b) of Theorem 6 of GS is incorrect. Our corrected Theorem 6 demonstrates that when the private signal tends to be perfect, the market converges to strongform efficiency, and thus traders have almost homogeneous beliefs about the stock payoff, but there is still significant trade between informed and uninformed traders for any finite information costs. That is, a competitive equilibrium is compatible with an informationally efficient market in the limit. Similarly, we find that when traders tend to be risk neutral, the market converges to strong-form efficiency, and there is also significant net trade in the market. We further show that when the stock price becomes more informative, and thus traders’ beliefs about the stock payoff become closer, the market may not become thinner, and the net trade may even increase.
