Advertisement

Journal of Systems Science and Complexity

, Volume 31, Issue 5, pp 1302–1328 | Cite as

Sequential Fair Stackelberg Equilibria of Linear Strategies in Risk-Seeking Insider Trading

  • Fuzhou Gong
  • Yonghui Zhou
Article
  • 10 Downloads

Abstract

This paper develops a sequential fair Stackelberg auction model in which each of the two risk-seeking insiders has an equal chance to be a leader or follower at each auction stage. The authors establish the existence, uniqueness of sequential fair Stackelberg equilibria (in short, FSE) when both insiders adopt linear strategies, and find that at the sequential equilibria such two insiders compete aggressively that cause the liquidity of market to drop, the information to be revealed and the profit to go down very rapidly while the trading intensity goes substantially high. Furthermore, the authors also give continuous versions of corresponding parameters in the sequential FSE in closed forms, as the time interval between auctions approaches to zero. It shows that such parameters go down or up approximately exponentially and all of the liquidity of market, information and profit become zero while the trading intensity goes to infinity. Some numerical simulations about the sequential FSE are also illustrated.

Keywords

Continuous version insider trading risk-seeking sequential fair Stackelberg equilibria 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. [1]
    Kyle A S, Continuous auctions and insider trading, Econometrica, 1985, 53: 1315–1335.CrossRefMATHGoogle Scholar
  2. [2]
    Kyle A S and Wang F A, Speculation duopoly with agreement todisagree: Can overconfidence survive the market test?, Journal of Finance, 1997, 52: 2073–2090.CrossRefGoogle Scholar
  3. [3]
    Jain N and Mirman L, Insider trading with correlated signals, Economics Letters, 1999, 65: 105–133.CrossRefMATHGoogle Scholar
  4. [4]
    Luo S, The impact of public information on insider trading, Economics Letters, 2001, 112: 59–68.CrossRefMATHGoogle Scholar
  5. [5]
    Zhang W D, Impact of outsiders and disclosed insider trades, Financ. Res. Lett., 2008, 5: 137–145.CrossRefGoogle Scholar
  6. [6]
    Liu H and Zhang W D, Insider trading with public and shared information, Economic Modelling, 2008, 28: 1756–1762.CrossRefGoogle Scholar
  7. [7]
    Aase K K, Bjuland T, and Øksendal B, Partially informed noise traders, Math. Finan. Econ., 2012, 6: 93–104.MathSciNetCrossRefMATHGoogle Scholar
  8. [8]
    Zhou D, Overconfidence on public information, Economics Letters, 2011, 112: 239–242.MathSciNetCrossRefMATHGoogle Scholar
  9. [9]
    Zhou D Q, The virtue of overconfidence when you are not perfectly informed, Economic Modelling, 2015, 47: 105–110.CrossRefGoogle Scholar
  10. [10]
    Du S and Liu H, The overconfident trader does not always overreact to his information, Economic Modelling, 2015, 46: 384–390.CrossRefGoogle Scholar
  11. [11]
    Holden C W and Subrahmanyam A, Long-lived private information and imperfect competition, Journal of Finance, 1992, 47: 247–270.CrossRefGoogle Scholar
  12. [12]
    Jain N and Mirman L, Real and financial effects of insider trading with correlated signals, Economic Theory, 2000, 16: 333–353.CrossRefMATHGoogle Scholar
  13. [13]
    Daher W and Mirman L, Cournot duopoly and insider trading with two insiders, The Quarterly Review of Economics and Finance, 2006, 46: 530–551.CrossRefGoogle Scholar
  14. [14]
    Jain N and Mirman L, Effects of insider trading under different market structures, The Quarterly Review of Economics and Finance, 2002, 42: 19–39.CrossRefGoogle Scholar
  15. [15]
    Daher W and Mirman L, Market structure and insider trading, International Review of Economics and Finance, 2007, 16: 306–331.CrossRefGoogle Scholar
  16. [16]
    Daher W, Karam F, and Mirman L J, Insider trading with different market structures, International Review of Economics and Finance, 2012, 24: 143–154.CrossRefGoogle Scholar
  17. [17]
    Wang L F S and Wang Y C, Stackelberg real-leader in an insider trading model, Studies in Economics and Finance, 2010, 27: 30–46.CrossRefGoogle Scholar
  18. [18]
    Wang L F S, Wang Y C, and Ren S, Stackelberg financial-leader in insider trading model, International Review of Economics and Finance, 2009, 18: 123–131.CrossRefGoogle Scholar
  19. [19]
    Back K and Pedersen H, Long-lived information and intraday patterns, Journal of Financial Markets, 1998, 1: 385–402.CrossRefGoogle Scholar
  20. [20]
    Gong F Z and Zhou D Q, Insider trading in the market with rational expected price, arXiv: 1012.2160v1 [q-fin.TR], 2010.Google Scholar
  21. [21]
    Gong F Z and Liu H, The mixed equilibrium of insider trading in the market with rational expected price, Chapter 11 in Stochastic Analysis and Applications to Finance, Edited by Zhang T and Zhou X, World Scientific, 2012, 197–223.Google Scholar
  22. [22]
    Zhou Y H, Existence of linear strategy equilibrium in insider trading with partial observations, Journal of System Science & Complexity, 2016, 29(5): 1281–1292.MathSciNetCrossRefMATHGoogle Scholar
  23. [23]
    Aumann R J, Backward induction and common knowledge of rationality, Games and Economic Behavior, 1995, 8: 6–19.MathSciNetCrossRefMATHGoogle Scholar
  24. [24]
    Kreps D and Wilson R, Sequential equilibria, Econometrica, 1982, 50: 863–984.MathSciNetCrossRefMATHGoogle Scholar
  25. [25]
    Osborne M J and Rubinstein A, A Course in Game Theory, Cambridge, MIT, 1994.MATHGoogle Scholar
  26. [26]
    Graybill F A, An Introduction to Linear Statistical Models (I), McGraw-Hill, New York, 1961.MATHGoogle Scholar

Copyright information

© Institute of Systems Science, Academy of Mathematics and Systems Science, CAS and Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Academy of Mathematics and Systems ScienceChinese Academy of SciencesBeijingChina
  2. 2.Guizhou Normal UniversityGuizhouChina

Personalised recommendations