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

DOI10.1214/22-AAP1905arXiv2008.06377OpenAlexW3049631296MaRDI QIDQ6138899FDOQ6138899

Authors: Shreya Bose, Ibrahim Ekren 

Publication date: 16 January 2024

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

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.

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

zbMATH Keywords

optimal transportMarkov bridgesquasilinear partial differential equationsKyle's model with risk averse informed trader

Mathematics Subject Classification ID

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

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