Multidimensional stochastic liquidity in Kyle's model of informed trading

Abstract

We develop a variational formulation of Kyle's model of informed trading that accommodates stochastic liquidity and multiple traded assets. The main equilibrium result is stated first: under a martingale dual condition, a matrix-valued martingale depth process generates a linear-Gaussian equilibrium with stochastic matrix-valued price impact. We derive this martingale from a primal-dual problem, inspired by causal optimal transport, that characterizes the endogenous speed at which the insider injects private information into prices; in general, this problem admits only local martingale optimizers, and the martingale dual condition is the hypothesis that the optimizer is a true martingale. We interpret informed trading as the optimal liquidation of private information and verify the construction in the scalar and common-eigenbasis cases. The fully general matrix-valued case reduces to a coupled matrix FBSDE, which we isolate as the remaining obstruction. Along the way, we establish an independently interesting Doob-Meyer decomposition for general (not necessarily symmetric) matrix-valued submartingales.