Insider Trading with Penalties

Sylvain Carre, Pierre Collin-Dufresne and Franck Gabriel
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Sylvain Carre: National Research University Higher School of Economics - International College of Economics and Finance
Pierre Collin-Dufresne: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)
Franck Gabriel: Ecole Polytechnique Fédérale de Lausanne

No 19-68, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We establish existence and uniqueness of equilibrium in a generalised one-period Kyle (1985) model where insider trades can be subject to a size-dependent penalty. The result is obtained by considering uniform noise and holds for virtually any penalty function. Uniqueness is among all non-decreasing strategies. The insider demand and the price functions are in general non-linear, yet tractable. We apply this result to regulation issues. We show analytically that the penalty functions maximising price informativeness for given noise traders' losses eliminate small rather than large trades. We generalise this result to cases where a budget constraint distorts the set of penalties available to the regulator.

Keywords: Kyle equilibrium; insider trading (search for similar items in EconPapers)
JEL-codes: C72 G14 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2019-06
New Economics Papers: this item is included in nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1968

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