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Insider trading with different risk attitudes

Wassim Daher (), Harun Aydilek () and Elias G. Saleeby ()
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Harun Aydilek: Gulf University for Science and Technology

Journal of Economics, 2020, vol. 131, issue 2, No 2, 123-147

Abstract: Abstract This paper examines the impact of different risk attitudes on the financial decisions of two insiders trading in the stock market. We consider a static version of the Kyle (Econometrica 53:1315–1335, 1985) model with two insiders. Insider 1 is risk neutral while insider 2 is risk averse with negative exponential utility. First, we analytically prove the existence of a unique linear equilibrium. Second, we carry out a comparative static analysis with respect to the duopoly case of risk-neutral insiders (Tighe in Three essays on insider trading. Unpublished Ph.D dissertation, University of Illinois at Champaign-Urbana, 1989) and with respect to the duopoly case of risk-averse insiders (Holden and Subrahmanyam in Econ Lett 44:181–190, 1994) models. Our findings reveal that the market depth and the information revelation are higher in Tighe (1989) than in our model. However, compared to Holden and Subrahmanyam (1994), we find that the market depth depends crucially on the degree of risk aversion. Finally, we show that regardless of the degree of risk aversion, the stock price reveals more information in our model than the stock price in Holden and Subrahmanyam (1994).

Keywords: Insider trading; Risk neutrality; Risk aversion; Exponential utility; Market structure; Kyle model; G14; D82 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Insider Trading With Different Risk Attitudes (2017) Downloads
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DOI: 10.1007/s00712-020-00703-x

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