Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2010/9:
Strategic Insider Trading Equilibrium: A Filter Theory Approach
Knut K. Aase ()
, Terje Bjuland ()
and Bernt Øksendal ()
Abstract: The continuous-time version of Kyle's (1985) model of
asset pricing with asymmetric information is studied, and generalized in
various directions, i.e., by allowing time-varying liquidity trading, and
by having weaker a priori assumptions on the model. This extension is made
possible by the use of filtering theory. We derive the optimal trade for an
insider and the corresponding price of the risky asset; the insider's
trading intensity satisfies a deterministic integral equation, given
perfect inside information.
Keywords: Insider trading; equilibrium; strategic trade; linear filter theory; innovation equation; (follow links to similar papers)
JEL-Codes: G12; (follow links to similar papers)
23 pages, August 31, 2010
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