Dynamic asset risk-seeking insider trading under signal observation

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.

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Publication Details

Journal
AIMS Mathematics
Published
2025-01-01
DOI
https://doi.org/10.3934/math.2025500
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
0.00
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article

Dynamic asset risk-seeking insider trading under signal observation

Kai Xiao
AIMS Mathematics
Financial Markets and Investment Strategies
article

Dynamic asset risk-seeking insider trading under signal observation

Kai Xiao
article en

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.

AIMS MathematicsVol. 10(5)
Guizhou University of Finance and Economics (CN)
Openalex Percentile: Top 86%
Financial Markets and Investment Strategies
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