The Impact of Market Mood on a Dynamic Model of Insider Trading

Ruohan Wang, Jing Wang () and Zhi Yang
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Ruohan Wang: College of Mathematics and Statistics, Yili Normal University, Yining 835000, China
Jing Wang: College of Mathematics and Statistics, Yili Normal University, Yining 835000, China
Zhi Yang: College of Mathematics and Statistics, Yili Normal University, Yining 835000, China

Games, 2025, vol. 16, issue 4, 1-16

Abstract: According to the research, the proportions of various types of investors may or may not change in response to different trading strategies or complex trading environments. This paper investigates a single-period trading model for multiple risk-averse and risk-neutral insider traders. The distinction is that we consider the impact of the number of risk-averse traders and different types of insider traders on market liquidity. The model contains four types of trading entities: risk-neutral and risk-adverse insider traders, risk-neutral market makers, and noise traders. Firstly, we prove the existence and uniqueness of the model’s linear Nash equilibrium; secondly, we compare the model with multiple risk-neutral and risk-adverse insider traders in the market to the model with only risk-neutral insider traders and risk-adverse insider traders. It is shown that the market liquidity parameter λ decreases with the increase in the number of risk-averse persons N 2 in a particular range and increases with the increase in the number of risk-averse persons N 2 in another range. Markets with risk-neutral and risk-averse insider traders have consistently lower liquidity than markets with only risk-neutral insider traders. Comparing this to markets with only risk-adverse insider traders reveals that the number of risk-adverse traders heavily influences market liquidity.

Keywords: risk neutrality; risk aversion; market liquidity; Kyle model (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2025
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