An Infinite-Dimensional Insider Trading Game
Christian Keller, Michael C. Tseng

TL;DR
This paper extends Kyle's 1985 insider trading model to an infinite-dimensional setting with a continuum of assets, providing a comprehensive framework for understanding cross-asset information and trading strategies.
Contribution
It introduces an infinite-dimensional Bayesian trading game with a scalar fixed point equilibrium, bridging informed-trading theory and modern multi-asset markets.
Findings
Closed-form equilibrium trading strategies
Characterization of price impact across assets
Analysis of information efficiency in the model
Abstract
We generalize the seminal framework of Kyle (1985) to a many-asset setting, bridging the gap between informed-trading theory and modern trading practices. Specifically, we formulate an infinite-dimensional Bayesian trading game in which the informed trader's private information may concern arbitrary aspects of the cross-sectional payoff structure across a continuum of traded assets. In this general setting, we obtain a parsimonious equilibrium characterized by a single scalar fixed point, which yields closed-form characterizations of equilibrium trading strategy, price impact within and across markets, and the information efficiency of equilibrium prices.
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Taxonomy
TopicsFinancial Markets and Investment Strategies · Economic theories and models · Game Theory and Applications
