Insider Trading with Penalties

59 Pages Posted: 14 Jun 2019 Last revised: 2 Jan 2020

See all articles by Sylvain Carre

Sylvain Carre

National Research University Higher School of Economics - International College of Economics and Finance

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Franck Gabriel

Ecole Polytechnique Fédérale de Lausanne

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Date Written: May 14, 2019

Abstract

We establish existence and uniqueness of equilibrium in a generalised one-period Kyle (1985) model where insider trades can be subject to a size-dependent penalty. The result is obtained by considering uniform noise and holds for virtually any penalty function. Uniqueness is among all non-decreasing strategies. The insider demand and the price functions are in general non-linear, yet tractable.

We apply this result to regulation issues. We show analytically that the penalty functions maximising price informativeness for given noise traders' losses eliminate small rather than large trades. We generalise this result to cases where a budget constraint distorts the set of penalties available to the regulator.

Keywords: Kyle equilibrium, insider trading

JEL Classification: C72, G14

Suggested Citation

Carre, Sylvain and Collin-Dufresne, Pierre and Gabriel, Franck, Insider Trading with Penalties (May 14, 2019). Swiss Finance Institute Research Paper No. 19-68, Available at SSRN: https://ssrn.com/abstract=3388002 or http://dx.doi.org/10.2139/ssrn.3388002

Sylvain Carre (Contact Author)

National Research University Higher School of Economics - International College of Economics and Finance ( email )

Pokrovski Bulvar 11, Korpus Zh, Office 715
Moscow, 109028
Russia

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Franck Gabriel

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

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