Strategic Insider Trading Equilibrium with a non-fiduciary market maker

Knut Aase and Bernt Øksendal ()
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Bernt Øksendal: Dept. of Mathematics, University of Oslo, Postal: University of Oslo , Department of Mathematics, P.O. Box 1053 Blindern, N-0316 Oslo, Norway, https://www.mn.uio.no/math/english/people/aca/oksendal/

No 2019/2, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: The continuous-time version of Kyle's (1985) model is studied, in which market makers are not fiduciaries. They have some market power which they utilize to set the price to their advantage, resulting in positive expected profits. This has several implications for the equilibrium, the most important being that by setting a modest fee conditional of the order ow, the market maker is able to obtain a profit of the order of magnitude, and even better than, a perfectly informed insider. Our model also indicates why speculative prices are more volatile than predicted by fundamentals.

Keywords: Insider trading; asymmetric information; strategic trade; price distortion; non-fiduciary market maker; bid-ask spread; linear filtering theory; innovation equation (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-08-28, Revised 2019-12-12
New Economics Papers: this item is included in nep-mst
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http://hdl.handle.net/11250/2611566 Full text (application/pdf)

Related works:
Working Paper: Strategic Insider Trading Equilibrium with a Non-fiduciary Market Maker (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:nhhfms:2019_002

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