Insider Trading in Continuous Time

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.Mathematics Subject Classification 2010: 60G35, 62M20, 93E10, 94Axx

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“…However, this is proved to hold if x t is chosen optimally. 4 (iv) We do not assume a priori that there exists a function H such that…”

Section: The Modelmentioning

confidence: 99%

Strategic Insider Trading Equilibrium: A Filter Theory Approach

2010

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“…The models involving strategic traders viz. Kyle (1985) and others (e.g., Admati and Pfleiderer, 1988, Back, 1992, Foster and Viswanathan, 1996 have also adopted risk-neutrality as a special preference structure, and the versions with risk aversion (e.g., Subrahmanyam, 1991, Holden and Subrahmanyam, 1994, Baruch, 2002 have used the same CARA utility function as Grossman and Stiglitz (1980).…”

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Information, Expected Utility, and Portfolio Choice

Li¹,

Peleg²,

Subrahmanyam³

2010

J. Financ. Quant. Anal.

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We study the consumption-investment problem of an agent with a constant relative risk aversion preference function, who possesses noisy information about the future prospects of a stock. We also solve for the value of information to the agent in closed form. We find that information can significantly alter consumption and asset allocation decisions. For reasonable parameter ranges, information increases consumption in the vicinity of 25%. Information can shift the portfolio weight on a stock from 0% to around 70%. Thus, depending on the stock beta, the weight on the market portfolio can be considerably reduced with information, causing the appearance of underdiversification. The model indicates that stock holdings of informed agents are positively related to wealth, unrelated to systematic risk, and negatively related to idiosyncratic uncertainty. We also show that the dollar value of information to the agent depends linearly on his wealth and decreases with both the propensity to intermediate consumption and risk aversion.

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“…Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling Luciano Campi · Umut Ç etin the date of receipt and acceptance should be inserted later Abstract We study an equilibrium model for the pricing of a defaultable zero coupon bond issued by a firm in the framework of Back [2]. The market consists of a riskneutral informed agent, noise traders and a market maker who sets the price using the total order.…”

Section: Noname Manuscript No (Will Be Inserted By the Editor)mentioning

confidence: 99%

“…The company's default time is modelled by a random time τ defined on a probability space (Ω, F , P). The equilibrium framework of our model follows closely that of Back [2]. We refer the reader to Back [2] for motivation and details that are not explained in what follows.…”

Section: The Modelmentioning

confidence: 99%

“…The market maker chooses a pricing rule and the insider chooses a trading strategy where the cumulative demand of the noise traders is modelled by a Brownian motion. The equilibrium is defined similar to that in Back [2]. We show that in the equilibrium the insider's trades cannot be seen in the market and the default time becomes the first time that the continuous total order process falls below a certain barrier.…”

Section: Introductionmentioning

confidence: 96%

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Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling

Campi

Çetın

2007

Finance Stoch

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This document is the author's final manuscript accepted version of the journal article, incorporating any revisions agreed during the peer review process. Some differences between this version and the published version may remain. You are advised to consult the publisher's version if you wish to cite from it. Noname manuscript No. (will be inserted by the editor)Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling Luciano Campi · Umut Ç etin the date of receipt and acceptance should be inserted later Abstract We study an equilibrium model for the pricing of a defaultable zero coupon bond issued by a firm in the framework of Back [2]. The market consists of a riskneutral informed agent, noise traders and a market maker who sets the price using the total order. When the insider does not trade, the default time possesses a default intensity in market's view as in reduced-form credit risk models. However, we show that, in the equilibrium, the modelling becomes structural in the sense that the default time becomes the first time that some continuous observation process falls below a certain barrier. Interestingly, the firm value is still not observable. We also establish the no expected trade theorem that the insider's trades are inconspicuous.

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Insider Trading in Continuous Time

Cited by 382 publications

References 10 publications

Strategic Insider Trading Equilibrium: A Filter Theory Approach

Strategic Insider Trading Equilibrium: A Filter Theory Approach

Information, Expected Utility, and Portfolio Choice

Insider trading in an equilibrium model with default: a passage from reduced-form to structural modelling

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