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Introducing a spread into the Kyle model

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  • Salomonsson, Marcus

    ()
    (Dept. of Economics, Stockholm School of Economics)

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    Abstract

    The Kyle (1985) model is extended to take into account market maker competition and the spread. It is shown that with a spread the Kyle model has a Nash equilibrium also with two market makers, not only with three or more, as shown in earlier research. The spread is endogenized, and two testable predictions of the model are generated. The first is that the spread is increasing in the standard deviation of the fundamentals. The second is that it is independent of the standard deviation of noise trades.

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    File URL: http://swopec.hhs.se/hastef/papers/hastef0713.pdf
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    Bibliographic Info

    Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 713.

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    Length: 27 pages
    Date of creation: 11 Mar 2009
    Date of revision:
    Handle: RePEc:hhs:hastef:0713

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    Keywords: market microstructure; spread; market maker;

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