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Continuous auctions and insider trading: uniqueness and risk aversion

Author

Listed:
  • Kyung-Ha Cho

    (BCV, FAME, and HEC, University of Lausanne, CH-1015 Lausanne, Switzerland Manuscript)

Abstract

The Kyle (1985) and Back (1992) model of continuous-time asset pricing with asymmetric information is studied. A larger class of price processes is considered, namely price processes that allow the price to depend in a certain way on the path of the market order. A no expected (or inconspicuous insider) trade theorem\/ is satisfied regardless of how much the informed agent is sensitive to the risk. When the informed agent is risk-neutral, the price pressure is constant over time and the price depends only on the cumulative market order. As a corollary, this paper extends Kyle's (1985) and Back's (1992) uniqueness result by showing that the equilibrium is also unique on this larger class of price processes. When the informed agent is risk-averse, in contrast, the price pressure decreases over time and the price depends on the entire path. The price pressure with risk aversion converges uniformly to the risk-neutral price pressure as the informed agent becomes less and less risk-averse; similarly, the equilibrium with risk aversion converges to the risk-neutral equilibrium.

Suggested Citation

  • Kyung-Ha Cho, 2003. "Continuous auctions and insider trading: uniqueness and risk aversion," Finance and Stochastics, Springer, vol. 7(1), pages 47-71.
    • Handle: RePEc:spr:finsto:v:7:y:2003:i:1:p:47-71
    Note: received: October 2001; final version received: April 2002
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    More about this item

    Keywords

    Market microstructure; insider trading; stochastic optimal control; optimal filtering; perfect Bayesian equilibrium; continuous-time finance;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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