Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/323563 
Year of Publication: 
2024
Citation: 
[Journal:] Mathematics and Financial Economics [ISSN:] 1862-9660 [Volume:] 19 [Issue:] 1 [Publisher:] Springer Berlin Heidelberg [Place:] Berlin/Heidelberg [Year:] 2024 [Pages:] 39-66
Publisher: 
Springer Berlin Heidelberg, Berlin/Heidelberg
Abstract: 
Abstract We present a new discrete time version of Kyle’s (Econometrica 53(6):1315–1335, 1985) classic model of insider trading, formulated as a generalised extensive form game. 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 (Proc Natl Acad Sci 38(10):886–893, 1952) and prove the existence of a sequential Kyle equilibrium, following Kreps and Wilson (Econometrica 50(4):863–894, 1982). This works for any probability distribution with finite support of the noise trader’s demand and the true value, and for any finite information flow of the insider. In contrast to Kyle (1985) with normal distributions, equilibria exist in general only in mixed strategies and not in pure strategies. 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.
Subjects: 
Information asymmetry
Kyle model
Extensive form game
Sequential equilibrium
Komlós’ theorem
Persistent Identifier of the first edition: 
Additional Information: 
C73;D53;D82;G14
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version
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