Insider Trading with Semi-Informed Traders and Information Sharing: The Stackelberg Game

Wassim Daher, Fida Karam and Naveed Ahmed
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Fida Karam: Department of Economics and Finance, Gulf University for Science and Technology, P.O. Box 7207, Hawally 32093, Kuwait
Naveed Ahmed: Department of Mathematics and Natural Sciences, Gulf University for Science and Technology, P.O. Box 7207, Hawally 32093, Kuwait

Mathematics, 2023, vol. 11, issue 22, 1-16

Abstract: This paper presents a financial Stackelberg game model with two partially informed risk neutral insiders. Each insider receives a private signal about the stock value and competes with the other insider under a Stackelberg setting. Linear strategies for the game’s participants are considered and normal distributions for the fundamentals are assumed. Based on the Stackelberg game and the Backward Induction theory, the unique linear equilibrium is characterized. The findings reveal that the level of partial information might increase/decrease the insiders’ profits as well as the market parameter in the Stackelberg setting relative to the Cournot setting. Additionally, this paper considers the information sharing scenario between the two insiders competing in this Stackelberg game. The results show that multiple equilibria exist in contrast to the information sharing scenario in the Cournot game where the Nash equilibrium is unique.

Keywords: insider trading; risk neutrality; partial information; Stackelberg structure; Kyle model (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
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