Insider Trading under Two-Sided Ambiguity

This study investigates how two-sided ambiguity faced by the insider and the market maker interactively affects the asset market equilibrium. We adopt Kyle’s (1985) framework and develop a model in which the ambiguity-averse insider and market maker face different types of ambiguity. Probability distributions taken by the insider and the market maker under their worst-case scenarios interactively affect the asset market equilibrium. We find that the insider’s ambiguity always increases the market depth. On the other hand, the effect of the market maker’s ambiguity on the market depth depends on the amount of aggregate demand for the asset. The market maker’s ambiguity decreases the market depth when there is a non-negative aggregate demand, but it increases the market depth otherwise.