Equilibrium Price and Optimal Insider Trading Strategy Under Stochastic Liquidity with Long Memory
Publication Name
Applied Mathematics and Optimization
Abstract
In this paper, the Kyle model of insider trading is extended by characterizing the trading volume with long memory and allowing the noise trading volatility to follow a general stochastic process. Under this newly revised model, the equilibrium conditions are determined, with which the optimal insider trading strategy, price impact and price volatility are obtained explicitly. The volatility of the price volatility appears excessive, which is a result of the fact that a more aggressive trading strategy is chosen by the insider when uninformed volume is higher. The optimal trading strategy turns out to possess the property of long memory, and the price impact is also affected by the fractional noise.
Open Access Status
This publication may be available as open access
Volume
84
Issue
2
First Page
1209
Last Page
1237
Funding Number
11471230
Funding Sponsor
National Natural Science Foundation of China