Scandinavian Working Papers in Economics
Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science
No 2010/9: Strategic Insider Trading Equilibrium: A Filter Theory Approach
Knut K. Aase (), Terje Bjuland () and Bernt Øksendal
Additional contact information
Knut K. Aase: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Terje Bjuland: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Bernt Øksendal: Department of Mathematics, University of Oslo, Postal: University of Oslo , Department of Mathematics, PO Box 1053, Blindern, NO-0316 Oslo, Norway
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
JEL-codes: G12
23 pages, August 31, 2010
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