Insider trading and risk aversion

Baruch, Shmuel

doi:10.1016/s1386-4181(01)00031-3

Cited by 74 publications

(61 citation statements)

References 11 publications

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“…The models involving strategic traders viz. Kyle (1985) and others (e.g., Admati and Pfleiderer, 1988, Back, 1992, Foster and Viswanathan, 1996 have also adopted risk-neutrality as a special preference structure, and the versions with risk aversion (e.g., Subrahmanyam, 1991, Holden and Subrahmanyam, 1994, Baruch, 2002 have used the same CARA utility function as Grossman and Stiglitz (1980).…”

mentioning

confidence: 99%

Information, Expected Utility, and Portfolio Choice

Li¹,

Peleg²,

Subrahmanyam³

2010

J. Financ. Quant. Anal.

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We study the consumption-investment problem of an agent with a constant relative risk aversion preference function, who possesses noisy information about the future prospects of a stock. We also solve for the value of information to the agent in closed form. We find that information can significantly alter consumption and asset allocation decisions. For reasonable parameter ranges, information increases consumption in the vicinity of 25%. Information can shift the portfolio weight on a stock from 0% to around 70%. Thus, depending on the stock beta, the weight on the market portfolio can be considerably reduced with information, causing the appearance of underdiversification. The model indicates that stock holdings of informed agents are positively related to wealth, unrelated to systematic risk, and negatively related to idiosyncratic uncertainty. We also show that the dollar value of information to the agent depends linearly on his wealth and decreases with both the propensity to intermediate consumption and risk aversion.

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mentioning

confidence: 99%

Information, Expected Utility, and Portfolio Choice

Li¹,

Peleg²,

Subrahmanyam³

2010

J. Financ. Quant. Anal.

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“…Since the liquidation value v and the volatility of noise trade volume σ are given exogenously, the equilibrium is equal to find a pair t t ( , ) λ β as a natural consequence. Compared to Baruch (2002), since he considers elastic noise demand function the variance of noise trading quantity is not constant any more. This is the main difference and main factor that makes it hard to obtain the informed trader's value function explicitly.…”

Section: Equilibriummentioning

confidence: 99%

“…Furthermore, the explicit market pressure actually has the similar form with that of Baruch (2002). He derives the system of differential equation for market pressure and conditional variance t Σ of v given the order flow until time t. Since he considers the elastic noise demand the volatility of noise trading is not constant any more.…”

Section: Proposition 31: the Hjb Equation Of The Informed Trader's Vmentioning

confidence: 99%

“…The risk aversion of informed trader is included in Subrahmanyam (1991) and extended into discrete time setting by Holden and Subrahmanyam (1994). Baruch (2002) studies continuous time model with a single risk-averse informed trader. His model is an extended version of Back (1992) and Hoden and Subrahmanyam (1994).…”

Section: Introductionmentioning

confidence: 99%

“…The model developed in this paper is similar to Baruch (2002). However, we apply dynamic programming principle to derive the equilibrium outcomes so that the market depth, optimal demand function for informed trader, and his value function are obtained explicitly.…”

Section: Introductionmentioning

confidence: 99%

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A Risk-Averse Insider and Asset Pricing in Continuous Time

Lim¹

2013

Management Science and Financial Engineering

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This paper derives an equilibrium asset price when there exist three kinds of traders in financial market: a risk-averse informed trader, noise traders, and risk neutral market makers. This paper is an extended version of Kyle's (1985, Econometrica) continuous time model by introducing insider's risk aversion. We obtain not only the equilibrium asset pricing and market depth parameter but also insider's value function and optimal insider's trading strategy explicitly. The comparative static shows that the market depth (the reciprocal of market pressure) increases with time and volatility of noise traders' trading.

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