An equilibrium model of insider trading in continuous time
This paper concerns a Bayesian-Nash equilibrium model for a market with no transaction cost, a risk-free asset, and a risky asset. As usual in such problems, there are three types of agents: a market maker, a representative noise trader, and an insider trader. This one receives a continuous flow of information, while the market maker only knows the earning announcement and sets the price of the risky asset, as a rational price. Because of asymmetric information, a filtering problem is introduced, supposed to be linear, so a tool is Kalman-Bucy filter. The main result delivers that actually in equilibrium the insider's optimal strategy is a linear function of the market maker's estimation error of private information. The influence of risk aversion is studied. At last, we can stress that the introduction well comments the references and thus give a good ``state of the art''.
scientific article; zbMATH DE number 5633341