"A mathematical equilibrium model for insider trading in finance"

5 February 2008
Professor Bernt Oksendal
A trader in finance is called an insider if she (or he) knows more about the prices in the market than can be obtained from the market history itself. This is the case if, for example, the trader knows something about the future price/value of a stock. We discuss the following question: What is the optimal portfolio of an insider who wants to maximize her expected profit at a given future time? The problem is that heavy trading by the insider will reveal parts of her inside price information to the market and thereby reduce her information advantage. We will solve this problem by presenting a general anticipative stochastic calculus model for insider trading. Our results generalize equilibrium results due to Kyle (1985) and Back (1992). The presentation is partly based on recent joint work with Knut Aase and Terje Bjuland, both at the Norwegian School of Economics and Business Administration (NHH).
  • Mathematical Finance Seminar