Insider Trading and Strategies: A Simulation Study

• Activity Number: 574
• Type: Contributed
• Date/Time: Wednesday, August 1, 2012 : 2:00 PM to 3:50 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Feng Liu*+
• Companies: University of North Carolina at Chapel Hill
• Keywords: asymmetric information ; microstructure ; informed trading ; Strategic trade model ; Kyle model

Abstract

Market microstructure studies market friction and asymmetric information impact on security prices. Kyle (1985)'s strategic trade model is one of the most cited models in the field of microstructure. Kyle develops the optimal trading behavior for the informed trader and shows that the agent will trade on his information only gradually, rather than exploit it to the maximum extent possible. Due to the iterative nature of original solutions, it requires numeric approximation to get optimum for a given set of inputs. This become computationally challenging if the inputs are assumed random or number of periods tends to be large. We have yet to see Kyle's simulation or statistical inference using exact solutions on large scale, most papers relate to modified Kyle's price impact coefficient in explaining market behavior or on asset pricing. This paper focus on simulation results using our novel derived unique solution, and its capability to fit large data application. We also show patterns for insider's optimal strategies under equilibrium.