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Insider Trading in Continuous Time

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  • Back, Kerry

Abstract

The continuous-time version of A. Kyle's (1985) model of asset pricing with asymmetric information is studied. It is shown that there is a unique equilibrium pricing rule within a certain class. This pricing rule is obtained in closed form for general distributions of the asset value. A particular example is a lognormal distribution, for which the equilibrium price process is a geometric Brownian motion. General trading strategies are allowed. In equilibrium, the informed agent, who is risk neutral, has many optima, but he does not correlate his trades locally with the noise trades nor does he submit discrete orders. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
  • Handle: RePEc:oup:rfinst:v:5:y:1992:i:3:p:387-409
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