INSIDER TRADING WITH TEMPORARY PRICE IMPACT

We model an informed agent with information about the future value of asset trying to maximize profits when agent’s trades are subjected a transaction cost as well market maker tasked setting fair prices. In single auction model, equilibrium is characterized by unique root particular polynomial. Analysis this polynomial small levels risk-aversion and costs reveal dimensionless parameter which captures several orders asymptotic accuracy behavior. continuous time analogue incorporation allows optimal trading strategy be obtained in feedback form. Linear solution system two ordinary differential equations, one forward backward. When effect, price set not fully revealing private signal, leaving gap at end interval. considering vanishing costs, pricing rules converge their frictionless counterparts.