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Insider Trading and Market Efficiency with Risk- and Ambiguity-Aversion

We extend Chau and Vayanos’ (Chau and Vayanos, 2008) analysis of an asset market with a strategic insider to the case in which she is risk-averse. As she finds it optimal to trade more aggressively and reveal her private information at a faster pace than her risk-neutral counterpart, risk-aversion is beneficial to the efficiency of the market. As her optimal strategy is identified by a min-max choice mechanism, according to which in any round of trading she first identifies the worst liquidity shock and then selects the optimal market order against such shock, our analysis also represents an ambiguity-averse informed trader who faces Knightian uncertain over market conditions and seeks to implement a robust trading strategy.