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Insider Trading Under Discreteness

Author

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  • MASSIMO SCOTTI

    (School of Finance and Economics, University of Technology Sydney, P.O. Box 123, Broadway, NSW 2007, Australia)

Abstract

This paper analyzes a version of the static Kyle's (1985) model of insider trading where both the distribution of the liquidation value of the risky asset and the distribution of the order flow of noise traders are discrete. We derive necessary and sufficient conditions for the existence of perfect Bayesian equilibria where the insider's strategy is increasing in the value of the asset, and show that such equilibria can be constructed if and only if the variance of the asset is not too extreme. The results in this paper are relevant in contexts where a discrete version of the static Kyle's (1985) model might be a convenient modelling choice.

Suggested Citation

  • Massimo Scotti, 2011. "Insider Trading Under Discreteness," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(05), pages 757-771.
    • Handle: RePEc:wsi:ijtafx:v:14:y:2011:i:05:n:s0219024911006528
    DOI: 10.1142/S0219024911006528
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    References listed on IDEAS

    as
    1. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
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