Kyle-back models with risk aversion and non-Gaussian beliefs

DOI10.1214/22-AAP1905MaRDI QIDQ6138899zbMATH OpenOpenAlexFDO

Authors Shreya Bose, Ibrahim Ekren

Publication date 16 January 2024

Published in The Annals of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2008.06377

zbMATH Keywords

Kyle's model with risk averse informed traderMarkov bridgesoptimal transportquasilinear partial differential equations

Mathematics Subject Classification ID

Applications of stochastic analysis (to PDEs, etc.) (60H30) Diffusion processes (60J60) Economics of information (91B44)

Abstract: We show that the problem of existence of equilibrium in Kyle's continuous time insider trading model can be tackled by considering a forward-backward system coupled via an optimal transport type constraint at maturity. The forward component is a stochastic differential equation representing an endogenously determined state variable and the backward component is a quasilinear parabolic equation representing the pricing function. By obtaining a stochastic representation for the solution of such a system, we show the well-posedness of solutions and study the properties of the equilibrium obtained for small enough risk aversion parameter. In our model, the insider has exponential type utility and the belief of the market maker on the distribution of the price at final time can be non-Gaussian.

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Cited in

(3)

• Multidimensional Kyle-Back model with a risk averse informed trader
• Kyle's model with stochastic liquidity
• Equilibrium with heterogeneous information flows

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