22 research outputs found
Robustness of equilibrium in the Kyle model of informed speculation
We analyze a static Kyle (1983) model in which a risk-neutral informed trader can use arbitrary (linear or non-linear) deterministic strategies, and a nite number of market makers can use arbitrary pricing rules. We establish a strong sense in which the linear Kyle equilibrium is robust: the rst variation in any agent's expected payo with respect to a small variation in his conjecture about the strategies of others vanishes at equilibrium. Thus, small errors in a market maker's beliefs about the informed speculator's trading strategy do not reduce his expected payo s. Therefore, the original equilibrium strategies remain optimal and still constitute an equilibrium (neglecting the higher-order terms.) We also establish that if a non-linear equilibrium exists, then it is not robust
Strategic Trading with Market Closures
This paper analyzes the equilibrium trading strategies of informed traders
in the presence of market closures defined as periodic predictable stops of
trading. We construct a dynamic auction model based on rational strategic
behavior with asymmetric information across the agents. Empirical evidence
indicates that market closures have important impact on the information
structure of financial markets, in particular the private information flow.
In our model, the insiders repeatedly increase their informational advantage
over other agents by receiving private signals about fundamentals when the
market is closed. In a continuous-time setting, we solve a dynamic
programming problem and derive closed-form solutions for optimal
intertemporal strategies of both insiders and the market maker. The key
feature of insiders' optimal strategy is that they act strategically by
anticipating future market closures. Because of this, even though market
closures are periodic, the intertemporal pattern of optimal trading
strategies is \textit{not} periodic. This aperiodicity of trading is quite
important since while it is a definitive feature of the data, it has been
missing from the existing theoretical literature on market closures. In
agreement with broad empirical evidence, we obtain a U-shaped pattern of
trading volume during the periods when the market is open, superimposed on a
U-shaped pattern during the lifetime of the economy, before all information
about the asset is revealedstrategic trading, imperfect competition, assymetric information
Dealer attention, the speed of quote adjustment to information, and net dealer revenue
Using trade and quote data from the NYSE, we examine the relation between dealer attention, dealer revenue, and the probability of informed trade. We find that dealer revenue net of losses to better-informed traders in NYSE stocks is positively related to the speed at which quotes adjust to full information levels. The speed of quote adjustment is faster for stocks with greater dealer attention, as measured by a stock's relative prominence at its post and panel location on the NYSE floor. The level of dealer attention in turn is positively related to a stock's probability of information-based trading. The results are consistent with a theoretical model we derive in which dealers trade multiple securities and must optimally allocate their limited attention to monitoring order flow to minimize losses to better-informed traders.Dealers Market design Limited attention Market quality Trading costs