Kyle-back models with risk aversion and non-Gaussian beliefs. (English) Zbl 1538.60118
Summary: 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.
MSC:
| 60H30 | Applications of stochastic analysis (to PDEs, etc.) |
| 60J60 | Diffusion processes |
| 91B44 | Economics of information |
Keywords:
Kyle’s model with risk averse informed trader; Markov bridges; optimal transport; quasilinear partial differential equationsReferences:
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