Jean-Luc Vila

Insider Trading Without Normality

In this paper, we analyse the existence and uniqueness of equilibrium in a particular class of monopolistic rational expectations models. We show the equivalence between the Kyle (1985) model of insider trading where the insider observes the amount of noise trading and the Kyle (1989) model of informed speculation when there is one risk-neutral insider and many risk-neutral market makers. We show that in these two equivalent models: (i) There exists a unique equilibrium independently of the distribution of uncertainty; (ii) This equilibrium minimizes the expected gains of the informed agent under incentive compatibility constraints. We extend our results to a class of signalling games.

Optimal Dynamic Trading with Leverage Constraints

We solve for the optimal dynamic trading strategy of an investor who faces a leverage constraint, i.e., a limitation on his ability to borrow for the purpose of investing in a risky asset. We assume that the investor has constant relative risk aversion, and that the value of the risky asset follows a geometric Brownian motion. In the absence of the leverage constraint, the optimal strategy involves investing a fixed proportion of wealth in the risky asset. We prove that, in the presence of the leverage constraint, the optimal investment also involves investing a fixed proportion of wealth in the risky asset when the leverage constraint is not binding. However, the two proportions are different, reflecting the extent to which the investor alters his strategy even when the leverage constraint is not binding because of the possibility that the leverage constraint will become binding in the future.

Optimal Consumption and Portfolio Choice with Borrowing Constraints

Abstract In this paper, we use stochastic dynamic programming to study the intertemporal consumption and portfolio choice of an infinitely lived agent who faces a constant opportunity set and a borrowing constraint. We show that, under general assumptions on the agents utility function, optimal policies exist and can be expressed as feedback functions of current wealth. We describe these policies in detail, when the agents utility function exhibits constant relative risk aversion.Journal of Economic LiteratureClassification Numbers: G11, G12, D52.