Insider Trading with Residual Risk
Event details
| Date | 15.03.2016 |
| Hour | 12:00 › 13:00 |
| Speaker | Ryan DONNELLY (Postdoc, SFI@EPFL) |
| Location | |
| Category | Conferences - Seminars |
We consider an extension of the Kyle (1985) model in which the insider is risk-averse and does not have complete information about the terminal value of the traded asset. The simultaneous addition of both risk aversion and residual risk changes the nature of linear equilibrium for both the market-maker and the insider: the market-maker is now required to estimate the insider's inventory level in addition to the insider's private signal; the insider now bases her trades on her present inventory level and the market-maker's estimation of her inventory level, in addition to the market-maker's valuation error. We prove an existence result in the case of a single auction, and we give numerical examples of equilibria in the case of multiple auctions.
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