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Strategic Insider Trading Equilibrium: A Forward Integration Approach

Author

Listed:
  • Aase, Knut K.

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Bjuland, Terje

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Øksendal, Bernt

    (Dept. of Mathematics, University of Oslo)

Abstract

The continuous-time version of Kyle’s (1985) model of asset pricing with asymmetric information is studied, and generalized in various directions, i.e., by allowing time-varying noise trading, and by allowing the orders of the noise traders to be correlated with the insider’s signal. From rather simple assumptions we are able to derive the optimal trade for an insider; the trading intensity satisfies a deterministic integral equation, given perfect inside information. We use a new technique called forward integration in order to find the optimal trading strategy. This is an extension of the stochastic integral which takes account of the informational asymmetry inherent in this problem. The market makers’ price response is found by the use of filtering theory. The novelty is our approach, which could be extended in scope.

Suggested Citation

  • Aase, Knut K. & Bjuland, Terje & Øksendal, Bernt, 2007. "Strategic Insider Trading Equilibrium: A Forward Integration Approach," Discussion Papers 2007/24, Norwegian School of Economics, Department of Business and Management Science.
  • Handle: RePEc:hhs:nhhfms:2007_024
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    File URL: http://hdl.handle.net/11250/164116
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    Cited by:

    1. Albina Danilova & Michael Monoyios & Andrew Ng, 2009. "Optimal investment with inside information and parameter uncertainty," Papers 0911.3117, arXiv.org, revised Feb 2010.

    More about this item

    Keywords

    Insider trading; asymmetric information; equilibrium; strategic trade; filtering theory; forward integration;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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