A unified approach to informed trading via Monge-Kantorovich duality

Reda Chhaibi, Ibrahim Ekren, Eunjung Noh and Lu Vy

Papers from arXiv.org

Abstract: We solve a generalized Kyle model type problem using Monge-Kantorovich duality and backward stochastic partial differential equations. First, we show that the the generalized Kyle model with dynamic information can be recast into a terminal optimization problem with distributional constraints. Therefore, the theory of optimal transport between spaces of unequal dimension comes as a natural tool. Second, the pricing rule of the market maker and an optimality criterion for the problem of the informed trader are established using the Kantorovich potentials and transport maps. Finally, we completely characterize the optimal strategies by analyzing the filtering problem from the market maker's point of view. In this context, the Kushner-Zakai filtering SPDE yields to an interesting backward stochastic partial differential equation whose measure-valued terminal condition comes from the optimal coupling of measures.

Date: 2022-10
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