Strategic Insider Trading Equilibrium: A Forward Integration Approach

28 Pages Posted: 5 Dec 2007

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Terje Bjuland

Norwegian School of Economics (NHH) - Department of Finance

Bernt Oksendal

University of Oslo - Department of Mathematics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: 2007-11-08

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 noise trading, and by allowing the orders of the noise traders to be correlated with the insider's signal. From rather simple assumptions we are able to derive the optimal trade for an insider; the trading intensity satisfies a deterministic integral equation, given perfect inside information. We use a new technique called forward integration in order to find the optimal trading strategy. This is an extension of the stochastic integral which takes account of the informational asymmetry inherent in this problem. The market makers' price response is found by the use of filtering theory. The novelty is our approach, which could be extended in scope.

Keywords: Insider trading, asymmetric information, equilibrium, strategic trade, filtering theory, forward integration

Suggested Citation

Aase, Knut K. and Bjuland, Terje and Oksendal, Bernt, Strategic Insider Trading Equilibrium: A Forward Integration Approach (2007-11-08). NHH Dept. of Finance & Management Science Discussion Paper No. 2007/24. Available at SSRN: https://ssrn.com/abstract=1058441 or http://dx.doi.org/10.2139/ssrn.1058441

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Terje Bjuland

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Bernt Oksendal

University of Oslo - Department of Mathematics ( email )

P.O. Box 1053
Blindern, N-0162, Os
Norway
+47-2285 5913 (Phone)
+47-2285 4349 (Fax)

Norwegian School of Economics (NHH) - Department of Finance

Helleveien 30
N-5045 Bergen
Norway

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