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Insider Trading with Penalties

Author

Listed:
  • 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)

Abstract

We establish existence and uniqueness of equilibrium in a generalised one-period Kyle (1985) model where insider trades can be subject to a size-dependent penalty. The result is obtained by considering uniform noise and holds for virtually any penalty function. Uniqueness is among all non-decreasing strategies. The insider demand and the price functions are in general non-linear, yet tractable. We apply this result to regulation issues. We show analytically that the penalty functions maximising price informativeness for given noise traders' losses eliminate small rather than large trades. We generalise this result to cases where a budget constraint distorts the set of penalties available to the regulator.

Suggested Citation

  • Sylvain Carre & Pierre Collin-Dufresne & Franck Gabriel, 2019. "Insider Trading with Penalties," Swiss Finance Institute Research Paper Series 19-68, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1968
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    More about this item

    Keywords

    Kyle equilibrium; insider trading;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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