Insider Trading with Long-Memory Volume and Stochastic Liquidity

Summary

The paper extends the Kyle insider-trading model to account for trading volume with long memory and noise-trader volatility that follows a general stochastic process. It derives equilibrium conditions and uses them to characterize the insider’s optimal trading strategy, price impact, and price volatility. The stated result is that the insider trades more aggressively when uninformed volume is higher, which contributes to unusually variable price volatility. The optimal strategy itself inherits long-memory behavior, and price impact is influenced by fractional noise.

The document offers a theoretical model and explicit equilibrium results, rather than empirical tests or practical trading instructions. It does not specify the stochastic process, estimation procedure, or assumptions needed to apply the results to market data. Its conclusions therefore describe implications within the proposed model; their relevance to a particular market would depend on how well its long-memory and stochastic-liquidity assumptions fit that market.

Key ideas

• The model extends Kyle insider trading to include long-memory volume and stochastic noise-trading volatility.
• The equilibrium analysis characterizes the insider’s strategy, price impact, and price volatility.
• The insider trades more aggressively when uninformed trading volume is higher.
• The optimal strategy has long memory, while fractional noise also affects price impact.

Tags

# Equilibrium price and optimal insider trading strategy under stochastic liquidity with long memory


# Equilibrium price and optimal insider trading strategy under stochastic liquidity with long memory









In this paper, the Kyle model of insider trading is extended by characterizing the trading volume with long memory and allowing the noise trading volatility to follow a general stochastic process. Under this newly revised model, the equilibrium conditions are determined, with which the optimal insider trading strategy, price impact and price volatility are obtained explicitly. The volatility of the price volatility appears excessive, which is a result of the fact that a more aggressive trading strategy is chosen by the insider when uninformed volume is higher. The optimal trading strategy turns out to possess the property of long memory, and the price impact is also affected by the fractional noise.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.