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Information in Securities Markets: Kyle Meets Glosten and Milgrom

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  • Kerry Back
  • Shmuel Baruch
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    Abstract

    This paper analyzes models of securities markets with a single strategic informed trader and competitive market makers. In one version, uninformed trades arrive as a Brownian motion and market makers see only the order imbalance, as in Kyle (1985). In the other version, uninformed trades arrive as a Poisson process and market makers see individual trades. This is similar to the Glosten-Milgrom (1985) model, except that we allow the informed trader to optimize his times of trading. We show there is an equilibrium in the Glosten-Milgrom-type model in which the informed trader plays a mixed strategy (a point process with stochastic intensity). In this equilibrium, informed and uninformed trades arrive probabilistically, as Glosten and Milgrom assume. We study a sequence of such markets in which uninformed trades become smaller and arrive more frequently, approximating a Brownian motion. We show that the equilibria of the Glosten-Milgrom model converge to the equilibrium of the Kyle model. Copyright The Econometric Society 2004.

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    File URL: http://hdl.handle.net/10.1111/j.1468-0262.2004.00497.x
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    Bibliographic Info

    Article provided by Econometric Society in its journal Econometrica.

    Volume (Year): 72 (2004)
    Issue (Month): 2 (03)
    Pages: 433-465

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    Handle: RePEc:ecm:emetrp:v:72:y:2004:i:2:p:433-465

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    Cited by:
    1. Dumitrescu, Ariadna, 2010. "The strategic specialist and imperfect competition in a limit order market," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 255-266, January.
    2. Ozsoylev, Han N. & Takayama, Shino, 2010. "Price, trade size, and information revelation in multi-period securities markets," Journal of Financial Markets, Elsevier, vol. 13(1), pages 49-76, February.
    3. Bowe, Michael & Hyde, Stuart & McFarlane, Lavern, 2013. "Duration, trading volume and the price impact of trades in an emerging futures market," Emerging Markets Review, Elsevier, vol. 17(C), pages 89-105.
    4. Pierre Collin-Dufresne & Vyacheslav Fos, 2012. "Insider Trading, Stochastic Liquidity and Equilibrium Prices," NBER Working Papers 18451, National Bureau of Economic Research, Inc.
    5. Trifan, Emanuela, 2004. "Entscheidungsregeln und ihr Einfluss auf den Aktienkurs," Darmstadt Discussion Papers in Economics 37282, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
    6. Emmanuel Haven, 2008. "Private Information and the ‘Information Function’: A Survey of Possible Uses," Theory and Decision, Springer, vol. 64(2), pages 193-228, March.
    7. Cheng Li & Hao Xing, 2013. "Asymptotic Glosten Milgrom equilibrium," Papers 1310.4994, arXiv.org, revised Apr 2014.
    8. Earl A. Thompson & Jonathan Treussard & Charles R. Hickson, 2004. "Predicting Bubbles and Bubbles-Substitutes," UCLA Economics Working Papers 836, UCLA Department of Economics.
    9. Christoph K\"uhn & Matthias Riedel, 2012. "Price-Setting of Market Makers: A Filtering Problem with an Endogenous Filtration," Papers 1210.4000, arXiv.org.
    10. Andreas Park, 2008. "Bid-Ask Spreads and Volume:The Role of Trade Timing," Working Papers tecipa-309, University of Toronto, Department of Economics.
    11. Andreas Park & Daniel Sgroi, 2008. "Herding and Contrarianism in a Financial Trading Experiment with Endogenous Timing," Working Papers tecipa-341, University of Toronto, Department of Economics.
    12. Polimenis, Vassilis, 2005. "Slow and fast markets," Journal of Economics and Business, Elsevier, vol. 57(6), pages 576-593.
    13. Anna Obizhaeva & Jiang Wang, 2005. "Optimal Trading Strategy and Supply/Demand Dynamics," NBER Working Papers 11444, National Bureau of Economic Research, Inc.
    14. Muendler, Marc-Andreas, 2008. "Risk-neutral investors do not acquire information," Finance Research Letters, Elsevier, vol. 5(3), pages 156-161, September.
    15. Muendler, Marc-Andreas, 2005. "Risk Neutral Investors Do Not Acquire Information¤," University of California at San Diego, Economics Working Paper Series qt8fg5g853, Department of Economics, UC San Diego.
    16. Umut \c{C}etin & Hao Xing, 2012. "Point process bridges and weak convergence of insider trading models," Papers 1205.4358, arXiv.org, revised Jan 2013.
    17. Kalaitzoglou, Iordanis & Ibrahim, Boulis M., 2013. "Does order flow in the European Carbon Futures Market reveal information?," Journal of Financial Markets, Elsevier, vol. 16(3), pages 604-635.

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