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Strategic Insider Trading Equilibrium: A Forward Integration Approach

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Author Info
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.

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Publisher Info
Paper provided by Department of Finance and Management Science, Norwegian School of Economics and Business Administration in its series Discussion Papers with number 2007/24.

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Length: 27 pages
Date of creation: 08 Nov 2007
Date of revision:
Handle: RePEc:hhs:nhhfms:2007_024

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Related research
Keywords: Insider trading; asymmetric information; equilibrium; strategic trade; filtering theory; forward integration;

Find related papers by JEL classification:
C00 - Mathematical and Quantitative Methods - - General - - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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