Paper: arXiv 2603.21842

Authors: S. Viswanathan, Hao Xing

Abstract

We study an information acquisition problem in which an informed trader acquires costly information prior to trading in the Kyle equilibrium. The cost of information acquisition is represented by an entropy cost. Regardless of the prior distribution of the asset payoff, continuous signals are optimal. Moreover, any continuously distributed signal, together with an associated logit type posterior distribution of the payoff, yields the same ex-ante value for the informed trader, the same distribution of posterior expected payoff, and the same unconditional distribution of the informed trader’s trading strategy. Consequently, a normally distributed signal can be adopted without loss of generality. We further show that when the information acquisition cost increases or the volatility of noise trades decreases, the variance of the posterior expected payoff declines, the profit potential from trading diminishes, meanwhile the posterior expected payoff increasingly resembles a normal distribution, and the information leakage cost from trading decreases.

Complexity vs Empirical Score

  • Math Complexity: 8.0/10
  • Empirical Rigor: 1.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: This paper presents a strong theoretical advance in market microstructure by introducing flexible entropy-based information acquisition to the classical Kyle model. It relies heavily on advanced mathematical proofs and stochastic calculus, but it is strictly theoretical and lacks empirical backtesting or real-world dataset validation.

Research Flowchart

  flowchart TD
    A[Research Goal: Analyze Flexible Information Acquisition in Kyle Model] --> B[Inputs: Prior Payoff Distribution & Entropy Information Cost]
    B --> C[Methodology: Model Informed Trader's Optimal Signal Choice]
    C --> D[Derive Optimal Signals & Associated Logit Posterior Distributions]
    D --> E[Key Finding 1: Continuous Normal Signals Optimal Without Loss of Generality]
    D --> F[Key Finding 2: Higher Cost / Lower Noise Volatility Decreases Profit & Increases Posterior Normality]

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0 of 46 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.