A Risk-Averse Insider and Asset Pricing in Continuous Time

Byung Hwa Lim
May 2013
Management Science & Financial Engineering;May2013, Vol. 19 Issue 1, p11
Academic Journal
This paper derives an equilibrium asset price when there exist three kinds of traders in financial market: a risk-averse informed trader, noise traders, and risk neutral market makers. This paper is an extended version of Kyle's (1985, Econometrica) continuous time model by introducing insider's risk aversion. We obtain not only the equilibrium asset pricing and market depth parameter but also insider's value function and optimal insider's trading strategy explicitly. The comparative static shows that the market depth (the reciprocal of market pressure) increases with time and volatility of noise traders' trading.


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