Strategic Insider Trading Equilibrium: A Forward Integration Approach

Knut Aase, Terje Bjuland () and Bernt Øksendal ()
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Terje Bjuland: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Bernt Øksendal: Dept. of Mathematics, University of Oslo, Postal: University of Oslo, Department of Mathematics, P.O.Box 1053 Blindern, N-0316 Oslo, Norway

No 2007/24, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

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.

Keywords: Insider trading; asymmetric information; equilibrium; strategic trade; filtering theory; forward integration (search for similar items in EconPapers)
JEL-codes: C00 G12 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007-11-08
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (1)

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