Continuous auctions and insider trading: uniqueness and risk aversion
type: Item
instance of: scholarly article
title: Continuous auctions and insider trading: uniqueness and risk aversion
zbMATH Open document ID: 1066.91057
author: Kyung-Ha Cho
published in: Finance and Stochastics
publication date: 2004-03-16T00:00:00Z
review text: The Kyle and Back model of continuous time asset pricing with asymmetric information is studied (see [\textit{A. S. Kyle}, Econometrica 53, 1315--1335 (1985; Zbl 0571.90010); \textit{K. Black}, Rev. Financial Stud. 5, 387--409 (1992)]). The author allows the price to take into account the history of cumulative market orders. It is shown that no expected (or inconspicuous insider) trade theorem is verified in equilibrium, i.e., the market expectation regarding the informed trading is zero regardless of how much the informed agent is sensitive to the risk. Two types of utility functions are considered: the identity function (risk-neutral) and a negative-exponential function (risk-averse). When the informed agent is risk-neutral, there is a unique equilibrium in which the price pressure is constant over time and the price depends only on the cumulative market order. In contrast, when the informed agent is risk-averse, the price pressure decreases over time and the price depends on the whole path. Optimality conditions and equilibrium pricing rules are considered. It is proved that the equilibrium with risk-aversion converges to the risk-neutral equilibrium as the degree of risk aversion goes to zero.
Mathematics Subject Classification ID: 91B24
Mathematics Subject Classification ID: 91B26
Mathematics Subject Classification ID: 93E11
Mathematics Subject Classification ID: 93E20
zbMATH DE Number: 2059099
zbMATH Keywords: market microstructure
zbMATH Keywords: insider trading
zbMATH Keywords: stochastic optimal control
zbMATH Keywords: optimal filtering
zbMATH Keywords: perfect Bayesian equilibrium
zbMATH Keywords: continuous-time finance
reviewed by: Yuliya S. Mishura
MaRDI profile type: Publication
full work available at URL: s007800200078
OpenAlex ID: W1988832155
DOI: 10.1007/S007800200078
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description: scientific article; zbMATH DE number 2059099