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Kyle–Back’S Model With A Random Horizon

Author

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  • JOSÉ MANUEL CORCUERA

    (Department of Mathematics and Computer Science, University of Barcelona, Gran Via de les Corts Catalanes 585, Barcelona 08007, Spain)

  • GIULIA DI NUNNO

    (#x2020;Department of Mathematics, University of Oslo, P.O. Box 1053 Blindern, Oslo 0316, Norway)

Abstract

The continuous-time version of Kyle [(1985) Continuous auctions and insider trading, Econometrica 53 (6), 1315–1335.] developed by Back [(1992) Insider trading in continuous time, The Review of Financial Studies 5 (3), 387–409.] is studied here. In Back’s model, there is asymmetric information in the market in the sense that there is an insider having information on the real value of the asset. We extend this model by assuming that the fundamental value evolves with time and that it is announced at a future random time. First, we consider the case when the release time of information is predictable to the insider and then when it is not. The goal of the paper is to study the structure of equilibrium, which is described by the optimal insider strategy and the competitive market prices given by the market makers. We provide necessary and sufficient conditions for the optimal insider strategy under general dynamics for the asset demands. Moreover, we study the behavior of the price pressure and the market efficiency. In particular, we find that when the random time is not predictable, there can be equilibrium without market efficiency. Furthermore, for the two cases of release time and for classes of pricing rules, we provide a characterization of the equilibrium.

Suggested Citation

  • José Manuel Corcuera & Giulia Di Nunno, 2018. "Kyle–Back’S Model With A Random Horizon," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-41, March.
    • Handle: RePEc:wsi:ijtafx:v:21:y:2018:i:02:n:s0219024918500164
    DOI: 10.1142/S0219024918500164
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    References listed on IDEAS

    as
    1. Peter Bank & Dietmar Baum, 2004. "Hedging and Portfolio Optimization in Financial Markets with a Large Trader," Mathematical Finance, Wiley Blackwell, vol. 14(1), pages 1-18, January.
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    Citations

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    Cited by:

    1. José Manuel Corcuera & Giulia Nunno & José Fajardo, 2019. "Kyle equilibrium under random price pressure," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 42(1), pages 77-101, June.
    2. Jos'e M. Corcuera & Giulia Di Nunno, 2020. "Path-dependent Kyle equilibrium model," Papers 2006.06395, arXiv.org, revised Oct 2022.
    3. Scott Robertson, 2023. "Equilibrium with Heterogeneous Information Flows," Papers 2304.01272, arXiv.org, revised Mar 2024.

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