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Strategic Insider Trading in Continuous Time: A New Approach

Author

Listed:
  • Aase, Knut K.

    (Dept. of Business and Management Science, Norwegian School of Economics)

  • Øksendal, Bernt

    (Dept. of Mathematics, University of Oslo)

Abstract

The continuous-time version of Kyle's (1985) model of asset pricing with asymmetric information is studied, and generalized by allowing time-varying noise trading. From rather simple assumptions we are able to derive the optimal trade for an insider; the trading intensity satisfies a deterministic integral equation, given perfect inside information, which we give a closed form solution to. We use a new technique called forward integration in order to find the optimal trading strategy. This is an extension of the stochastic integral which takes account of the informational asymmetry inherent in this problem. The market makers' price response is found by the use of filtering theory. The novelty is our approach, which could be extended in scope.

Suggested Citation

  • Aase, Knut K. & Øksendal, Bernt, 2019. "Strategic Insider Trading in Continuous Time: A New Approach," Discussion Papers 2019/3, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2019_003
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    File URL: http://hdl.handle.net/11250/2611571
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    References listed on IDEAS

    as
    1. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
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    More about this item

    Keywords

    Insider trading; asymmetric information; strategic trade; filtering theory; forward integration;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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