Strategic insider trading equilibrium: A filter theory approach
Journal article, Peer reviewed
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Original versionAfrika Matematika 2012;23:145-162 10.1007/s13370-011-0026-x
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.