Insider Trading with Penalties

53 Pages Posted: 29 Oct 2019 Last revised: 11 Jun 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

Multiple version iconThere are 2 versions of this paper

Date Written: June 11, 2020

Abstract

We establish existence and uniqueness of equilibrium in a generalized one-period Kyle (1985) model where insider trading can be subject to a penalty cost that is non-decreasing in the trade size.
The result is obtained for uniform noise and holds for general penalty functions. Uniqueness is among all non-decreasing strategies.
We construct the equilibrium price and optimal insider trading policy explicitly and find that, except for quadratic penalties, both are non-linear functions of, respectively, the trading volume and the liquidation value. We characterize the set of optimal penalties a regulator would choose to maximize price informativeness for given level of expected uninformed traders' losses. Efficient penalties eliminate small rather than large trades. We extend the analysis to the case where implementable regulations are constrained by a budget constraint and consider the robustness of our findings to different distributional assumptions.

Keywords: Kyle model, non-linear equilibria, existence and uniqueness, market microstructure, insider trading, market regulation, efficient penalties

JEL Classification: C72, G14

Suggested Citation

Carre, Sylvain and Collin-Dufresne, Pierre and Gabriel, Franck, Insider Trading with Penalties (June 11, 2020). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3475445 or http://dx.doi.org/10.2139/ssrn.3475445

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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