Insider Trading in the Market with Rational Expected Prices

Abstract

In the pioneering and influential Kyle's (1985) model, the market maker's pricing rule $\lambda_{n}$ is regarded as a constant when the insider submits her optimal strategy. We loosen this assumption by taking into account sufficiently the effect the insider's strategy $x_{n}$ has on it. When the insider is risk-neutral, she obtains a larger amount of profits in expectation in our model than that in Kyle's (1985) model. When the insider is risk-averse, we get a strong-form efficient market as the trading opportunity approaches infinity. While when the insider is risk-seeking, the information is released at an increasing speed.