Strategic Insider Trading in Continuous Time: A New Approach

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 2019/3, 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 by allowing time-varying noise trading. 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, which we give a closed form solution to. 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; strategic trade; filtering theory; forward integration (search for similar items in EconPapers)
JEL-codes: G00 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2019-08-29
New Economics Papers: this item is included in nep-mst and nep-ore
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