Insider trading in discrete time Kyle games

Category: Management & Microeconomics Brown Bag Seminar
When: 16 May 2024
, 12:30
 - 13:30
Where: RuW 4.201

Title: Insider trading in discrete time Kyle games

Abstract: We present a discrete time version of Kyle's (1985) classic model of insider trading. The model has three kinds of traders: an insider, random noise traders, and a market maker. The insider aims to exploit her informational advantage and maximise expected profits while the market maker observes the total order flow and sets prices accordingly. First, we show how the multi-period model with finitely many pure strategies can be reduced to a (static) social system in the sense of Debreu (1952) and prove the existence of a sequential Kyle equilibrium, following Kreps and Wilson (1982). This requires no probabilistic restrictions on the true value, the insider's dynamic information, and the noise trader's actions. In the single-period model we establish bounds for the insider's strategy in equilibrium. Finally, we prove the existence of an equilibrium for the game with a continuum of actions, by considering an approximating sequence of games with finitely many actions. Because of the lack of compactness of the set of measurable price functions, standard infinite-dimensional fixed point theorems are not applicable.