Interdepartmental research seminar
Insider Trading with Incomplete Information
Sponsored by: Operations & BAFI Dept.
Speaker(s): Rene Caldentey, Univ. of Chicago
Date & Time: Friday, Oct. 28 from 1 p.m. to 2:30 p.m.
In this talk we will discuss a continuous-time model of strategic trading with asymmetric information. The formulation builds upon the insider trading model introduced by Kyle (1985) with three important differences: (a) the fundamental value of the asset has a Bernoulli distribution, (b) this value is publicly revealed at a random (unpredictable) time and (c) the market maker is not certain that there is an insider. Assuming the market maker can shut down the market when the potential losses of liquidity traders are unbounded, we are able to explicitly construct a Markov equilibrium. In equilibrium, the market maker continuously update his beliefs about the value of the asset, but his beliefs about the presence of the insider remain constant. This paper is co-authored with Ennio Stacchetti, New York University.
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