Insider trading under discreteness

World Scientific Publishing Co
Publication Type:
Journal Article
International Journal of Theoretical and Applied Finance, 2011, 14 (5), pp. 757 - 771
Issue Date:
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This paper analyzes a version of the static Kyles (1985) model of insider trading where both the distribution of the liquidation value of the risky asset and the distribution of the order flow of noise traders are discrete. We derive necessary and sufficient conditions for the existence of perfect Bayesian equilibria where the insiders strategy is increasing in the value of the asset, and show that such equilibria can be constructed if and only if the variance of the asset is not too extreme. The results in this paper are relevant in contexts where a discrete version of the static Kyles (1985) model might be a convenient modelling choice.
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