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Insider Trading Under Discreteness

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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.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 14 (2011)
Issue (Month): 05 ()
Pages: 757-771

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Handle: RePEc:wsi:ijtafx:v:14:y:2011:i:05:p:757-771

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Related research

Keywords: Market microstructure; strategic trading; equilibrium multiplicity; Kyle (1985);

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