Insider trading with different risk attitudes
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Insider trading with different risk attitudes Wassim Daher1
•
Harun Aydilek1 • Elias G. Saleeby2
Received: 21 September 2018 / Accepted: 22 May 2020 / Published online: 9 June 2020 Ó Springer-Verlag GmbH Austria, part of Springer Nature 2020
Abstract This paper examines the impact of different risk attitudes on the financial decisions of two insiders trading in the stock market. We consider a static version of the Kyle (Econometrica 53:1315–1335, 1985) model with two insiders. Insider 1 is risk neutral while insider 2 is risk averse with negative exponential utility. First, we analytically prove the existence of a unique linear equilibrium. Second, we carry out a comparative static analysis with respect to the duopoly case of risk-neutral insiders (Tighe in Three essays on insider trading. Unpublished Ph.D dissertation, University of Illinois at Champaign-Urbana, 1989) and with respect to the duopoly case of riskaverse insiders (Holden and Subrahmanyam in Econ Lett 44:181–190, 1994) models. Our findings reveal that the market depth and the information revelation are higher in Tighe (1989) than in our model. However, compared to Holden and Subrahmanyam (1994), we find that the market depth depends crucially on the degree of risk aversion. Finally, we show that regardless of the degree of risk aversion, the stock price reveals more information in our model than the stock price in Holden and Subrahmanyam (1994). Keywords Insider trading Risk neutrality Risk aversion Exponential utility Market structure Kyle model
JEL Classifications G14 D82
& Wassim Daher [email protected] Harun Aydilek [email protected] Elias G. Saleeby [email protected] 1
Department of Mathematics and Natural Sciences, Kuwait and Center of Applied Mathematics and Bioinformatics (CAMB), Gulf University for Science and Technology, West Mishref, Kuwait
2
Mount Lebanon, Lebanon
123
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W. Daher et al.
1 Introduction Investors’ attitudes toward risk play a central role in their investments decisions. Most of the literature about investors’ risk attitudes, considers two types of risk tolerance: risk-neutral investors and risk-averse investors. In a recent paper on risk preferences, Falk et al. (2018) conduct a study on global variation in economic preferences in 76 countries and find out that there is a substantial heterogeneity in preferences across countries, and that these preferences drive the individual decision making. Our paper allows for risk heterogeneity among the investors and studies the impact of such risk heterogeneity on their financial decisions in the presence of insider trading. There is a large body of applied and theoretical studies of the insider trading problem and its impact on the financial markets. The importance of this problem is highlighted by the policies adopted by the Securities and Exchange Commission (SEC) and its push to investigate and prosecute those accused of insider trading. The celebrated (Kyle 1985) model provided a framework for the study of
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