Introducing a spread into the Kyle model
AbstractThe 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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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 713.
Length: 27 pages
Date of creation: 11 Mar 2009
Date of revision:
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market microstructure; spread; market maker;
Find related papers by JEL classification:
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
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