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arXiv · 2609.38701

Kyle meets time-inconsistency: a dynamic mean--variance informed trading problem

Shuoqing Deng·Zhichao Luo·Zhenhua Wang
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Abstract

We study a Kyle--Back model in which the informed trader has dynamic mean--variance preferences, leading to a time-inconsistent trading problem that is formulated as an intrapersonal game. The model combines two equilibrium requirements: a trading--pricing equilibrium between the informed trader and the market maker, and a time-consistent equilibrium among the trader's successive selves. Following the framework of Cho (2003), we consider both risk-neutral and risk-averse informed traders. In the risk-neutral case, we derive the equilibrium trading strategy and price impact explicitly. In the risk-averse case, we establish existence and characterize the equilibrium through a coupled system of nonlinear ordinary differential equations. Our main technique is to reduce the equilibrium conditions to a forward--backward ODE system and resolve the resulting boundary conditions by a shooting argument. Economically, the mean--variance preference reshapes the intertemporal trade-off between exploiting current private information and preserving future informational advantage, generating a declining term structure of price impact and shifting both information revelation and informed-trading profits toward earlier stages of the trading horizon.

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Shuoqing Deng, Zhichao Luo, Zhenhua Wang. 2026-09-30. Kyle meets time-inconsistency: a dynamic mean--variance informed trading problem. https://arxiv.org/abs/2609.38701

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