Insider Trading without Normality

In this paper, we analyse the existence and uniqueness of equilibrium in a particular class of monopolistic rational expectations models. We show the equivalence between the Kyle (1985) model of insider trading where the insider observes the amount of noise trading and the Kyle (1989) model of informed speculation when there is one risk-neutral insider and many risk-neutral market makers. We show that in these two equivalent models: (i) There exists a unique equilibrium independently of the distribution of uncertainty; (ii) This equilibrium minimizes the expected gains of the informed agent under incentive compatibility constraints. We extend our results to a class of signalling games.

[1]  Eric Maskin,et al.  The Efficient Market Hypothesis and Insider Trading on the Stock Market , 1990, Journal of Political Economy.

[2]  Sanford J. Grossman.  An Introduction to the Theory of Rational Expectations Under Asymmetric Information , 1981 .

[3]  Roy Radner,et al.  Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets , 1972 .

[4]  R. Radner,et al.  Team Decision Problems , 1962 .

[5]  Financial markets' liberalisation and the role of banks: Front-running and stock market liquidity , 1993 .

[6]  Martin Hellwig,et al.  On the aggregation of information in competitive markets , 1980 .

[7]  Insider trading and market manipulations--existence and uniqueness of equilibrium , 1991 .

[8]  Anat R. Admati,et al.  A Theory of Intraday Patterns: Volume and Price Variability , 1988 .

[9]  Utpal Bhattacharya,et al.  INSIDERS, OUTSIDERS AND MARKET BREAKDOWNS , 1991 .

[10]  George M. Constantinides,et al.  Capital Market Equilibrium with Personal Tax , 1983 .

[11]  J. Hirshleifer.  The Private and Social Value of Information and the Reward to Inventive Activity , 1971 .

[12]  Marco Pagano,et al.  Trading Volume and Asset Liquidity , 1989 .

[13]  Anat R. Admati.  A Noisy Rational Expectations Equilibrium for Multi-Asset Securities Markets , 1985 .

[14]  Avanidhar Subrahmanyam,et al.  Risk Aversion, Market Liquidity, and Price Efficiency , 1991 .

[15]  A. Röell.  Dual-capacity trading and the quality of the market , 1990 .

[16]  Jean-Luc Vila.  Simple games of market manipulation , 1989 .

[17]  Andreu Mas-Colell,et al.  The Price Equilibrium Existence Problem in Topological Vector Lattice s , 1986 .

[18]  Albert S. Kyle,et al.  Noise Trading and Takeovers , 1991 .

[19]  Xavier Vives,et al.  Aggregation of Information in Large Cournot Markets , 1988 .

[20]  Avanidhar Subrahmanyam,et al.  A Theory of Trading in Stock Index Futures , 1991 .

[21]  J. Aubin.  Mathematical methods of game and economic theory , 1979 .

[22]  Kai Lai Chung,et al.  A Course in Probability Theory , 1949 .

[23]  Gary B. Gorton,et al.  Security Baskets and Index-Linked Securities , 1991 .

[24]  Albert S. Kyle,et al.  Informed Speculation with Imperfect Competition , 1989 .

[25]  David M. Kreps,et al.  Signaling Games and Stable Equilibria , 1987 .

[26]  Robert E. Verrecchia,et al.  Information aggregation in a noisy rational expectations economy , 1981 .

[27]  A. Kyle.  Continuous Auctions and Insider Trading , 1985 .

[28]  Rational Expectations with Imperfect Competition: A Bertrand-Edgeworth Example , 1989 .

[29]  Sanford J. Grossman.  On the Impossibility of Informationally Efficient Markets , 1980 .