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Insider trading with penalties, entropy and quadratic BSDEs

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  • Umut c{C}etin

Abstract

Kyle model in continuous time where the insider may be subject to legal penalties is considered. In equilibrium the insider internalises this legal risk by trading less aggressively. The equilibrium is characterised via the solution of a backward stochastic differential equation (BSDE) whose terminal condition is determined as the fixed point of a non-linear operator in equilibrium. The insider's expected penalties in equilibrium is non-monotone in the fee structure and is given by the relative entropy of the law of a particular h-transformation of Brownian motion.

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  • Umut c{C}etin, 2023. "Insider trading with penalties, entropy and quadratic BSDEs," Papers 2311.12743, arXiv.org.
    • Handle: RePEc:arx:papers:2311.12743
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    File URL: http://arxiv.org/pdf/2311.12743
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    References listed on IDEAS

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    1. Umut Çetin, 2018. "Financial equilibrium with asymmetric information and random horizon," Finance and Stochastics, Springer, vol. 22(1), pages 97-126, January.
    2. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    3. Sylvain Carré & P. Collin-Dufresne & Franck Gabriel, 2022. "Insider Trading with Penalties," Post-Print hal-03689743, HAL.
    4. Back, Kerry, 1992. "Insider Trading in Continuous Time," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
    5. Peter M. DeMarzo & Michael J. Fishman & Kathleen M. Hagerty, 1998. "The Optimal Enforcement of Insider Trading Regulations," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 602-632, June.
    6. Carré, Sylvain & Collin-Dufresne, Pierre & Gabriel, Franck, 2022. "Insider trading with penalties," Journal of Economic Theory, Elsevier, vol. 203(C).
    7. Shin, Jhinyoung, 1996. "The Optimal Regulation of Insider Trading," Journal of Financial Intermediation, Elsevier, vol. 5(1), pages 49-73, January.
    8. Çetin, Umut, 2018. "Financial equilibrium with asymmetric information and random horizon," LSE Research Online Documents on Economics 84495, London School of Economics and Political Science, LSE Library.
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