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Insider Trading with Penalties

Author

Listed:
  • Sylvain Carré

    (Institut de Recherche pour le Développement (IRD), LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • P. Collin-Dufresne

    (Swiss Finance Institute [Lausanne] - EPFL - Ecole Polytechnique Fédérale de Lausanne)

  • Franck Gabriel

    (Département de Mathématiques - EPFL - EPFL - Ecole Polytechnique Fédérale de Lausanne)

Abstract

We consider a Kyle (1985) one-period model where insider trading may be subject to a penalty that is increasing in trade size. We characterize the solution - the equilibrium price and optimal trading strategy - explicitly and establish existence and uniqueness for an arbitrary penalty function for the case of uniformly distributed noise. We use this framework to capture the difference between legal and illegal insider trading, and identify the set of ‘efficient penalty functions' that would be optimal for a regulator that seeks to minimize expected uninformed traders' losses for a given level of price informativeness. Simple policies consisting of a fixed penalty upon nonzero trades belong to this set and can be used to implement any efficient outcome. Using numerical analysis, we show the robustness of our results to different distributional assumptions.

Suggested Citation

  • Sylvain Carré & P. Collin-Dufresne & Franck Gabriel, 2022. "Insider Trading with Penalties," Post-Print hal-03689743, HAL.
    • Handle: RePEc:hal:journl:hal-03689743
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    Citations

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    Cited by:

    1. Daher, Wassim & Karam, Fida & Ahmed, Naveed, 2023. "Insider Trading with Semi-Informed Traders and Information Sharing: The Stackelberg Game," MPRA Paper 118138, University Library of Munich, Germany.
    2. Wassim Daher & Fida Karam & Naveed Ahmed, 2023. "Insider Trading with Semi-Informed Traders and Information Sharing: The Stackelberg Game," Mathematics, MDPI, vol. 11(22), pages 1-16, November.
    3. Umut c{C}etin, 2023. "Insider trading with penalties, entropy and quadratic BSDEs," Papers 2311.12743, arXiv.org.

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