Strategic Insider Trading in Continuous Time: A New Approach

31 Pages Posted: 30 Aug 2019

See all articles by Knut K. Aase

Knut K. Aase

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

Bernt Oksendal

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

Date Written: August 22, 2019

Abstract

The continuous-time version of Kyle's (1985) model of asset pricing with asymmetric information is studied, and generalized by allowing time-varying noise trading. 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, which we give a closed form solution to. 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, strategic trade, filtering theory, forward integration

JEL Classification: G00

Suggested Citation

Aase, Knut K. and Oksendal, Bernt, Strategic Insider Trading in Continuous Time: A New Approach (August 22, 2019). NHH Dept. of Business and Management Science Discussion Paper No. 2019/3. Available at SSRN: https://ssrn.com/abstract=3444895 or http://dx.doi.org/10.2139/ssrn.3444895

Knut K. Aase (Contact Author)

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

Helleveien 30
Bergen, NO-5045
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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