The Analysis Of The Insider's Trading Behavior

This paper is based on Kyle(1985)'s model, which mainly analyzes the insider's trading behavior, and is composed of the following three parts.In the second part, we assume reasonably that the insider couldn't observe the expost liquidation value of the risky asset v , but they can get the correlative value signal. We analyze the effect of the information distortion level on the insider's trading behavior, profits and market equilibrium through the introduction of the information distortion. It's different from the existent paper, which research Kyle(1985) mostly by the introduction of noisy trading . Through the analysis of the insider's demanding function, the market depth and the unconditional profit, we can get some significative result. We find that the insider's trading behavior turns more complex when there exists distortion of signal.In the third part of the paper, we assume that the market is weak-efficient. This part would analyze the effect of the weak-efficiency condition on the insider's trading behavior and the final strategic profit. Considering the technical difficulty of the expression of the market efficiency form in the mathematical model, we'll analyze a simplified situation that there's only one monopolic insider and only one trading period. We find that the weak-efficiency form and the distortion of the signal would strengthen the insider's monopolic power on information. Thus we re-analyze the insider's trading strategy and final revenue, generalize the one-period model in Kyle(1985) .In the fourth part of the article, to overcome the disadvantegy of the one-period model with only one insider, we introduce a multi-period competitive model with two insiders to study insiders' trading behavior. Based on this initial information, informed traders place orders with the market maker. Each period the market maker observes the total order flow from the informed and liquidity traders, and not knowing which orders come from which traders, announces an adjustment to the current share price atwhich all orders are filled. Such a market structure shows that the fluctuation of the price due to the competition among the different investors. So the assumption of the market structure is almost identical with the above parts. The relationship structure of the insiders' original information endowment has important effect on the three kinds of traders in the market. It's embodied obviously in the trading strategies and the final profits of the two insiders: compared with monopolic trader, the insiders' aggressive demand weakens, which makes the complete revelation of the price more slowly. As time goes by, the insiders' final profits are more and more similar with the case of one monopolic insider.