Insider Trading with Different Risk Preference on a Dynamic Risky Asset

For an insider trading model of a risky asset whose value is driven by an arithmetic Brownian motion, we establish a closed form of linear Bayesian equilibrium with a risk-neutral insider and a closed form of linear Bayesian equilibrium with a risk-averse insider respectively. It shows that (i) as time goes by, in the former equilibrium, residual information decreases but price pressure keeps constant, while in the latter, both residual information and price pressure decrease; (ii) as the insider becomes less and less risk-averse, the risk-averse equilibrium converges to the risk-neutral one; and (iii) when the volatility of the asset value goes to zero, the risk-averse equilibrium converges to the risk-averse one with a static risky asset in [Cho, K. Continuous auctions and insider trading. Finance and Stochastics, 7: 47–71 (2003)].