Year: 2025
Type: article
Abstract: In this paper, we investigated a continuous version of an insider trading model. There were three basic assumptions in this model: (1) the insider exhibited risk-seeking, (2) market makers could receive partial signals regarding the risky asset, and (3) the risky asset was driven by a standard Brownian motion. By employing optimal filtering theory and stochastic control theory, we derived some necessary conditions for market equilibrium. Additionally, we established both the existence and uniqueness of the market equilibrium. At equilibrium, we observed that as time progresses, the insider's residual information gradually diminished when the volatility of the risky asset was low. In contrast, if the volatility was high, the insider's residual information initially increased. Meanwhile, the partial observation coefficient remained constant, while both trading intensity and market liquidity increased over time.
Source: AIMS Mathematics
DOI: 10.3934/math.2025500
Author: Kai Xiao
Institution: Guizhou University of Finance and Economics
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $1,200
OpenAlex ID: W4410384703