Risk aversion of insider and dynamic asymmetric information

This paper studies a Kyle-Back model with a risk-averse insider possessing exponential utility and a dynamic stochastic signal about the asset's terminal fundamental value. While the existing literature considers either risk-neutral insiders with dynamic signals or risk-averse insiders with static signals, we establish equilibrium when both features are present. Our approach imposes no restrictions on the magnitude of the risk aversion parameter, extending beyond previous work that requires sufficiently small risk aversion. We employ a weak conditioning methodology to construct a Schrödinger bridge between the insider's signal and the asset price process, an approach that naturally accommodates stochastic signal evolution and removes risk aversion constraints. We derive necessary conditions for equilibrium, showing that the optimal insider strategy must be continuous with bounded variation. Under these conditions, we characterize the market-maker pricing rule and insider strategy that achieve equilibrium. We obtain explicit closed-form solutions for important cases including deterministic and quadratic signal volatilities, demonstrating the tractability of our framework.