, Volume 23, Issue 2, pp 145-162,
Open Access This content is freely available online to anyone, anywhere at any time.

Strategic insider trading equilibrium: a filter theory approach

Abstract

The continuous-time version of Kyle’s (Econometrica 53(6):1315–1336, 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.

The research leading to these results has received funding from the European Research Council under the European Community’s Seventh Framework Programme (FP7/2007-2013)/ERC grant agreement no [228087].