Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation
AbstractThis paper studies a dynamic version of the model proposed in Glosten and Milgrom (1985) with a long-lived informed trader. When the same individual can buy, and then sell, the same asset, the trader may profit from price manipulation. We make a fundamental contribution by clarifying the conditions under which a unique equilibrium exists, and in what situations this equilibrium involves price manipulation. We propose a concept that we refer to as a â€œtameâ€ equilibrium, and derive a bound for the number of trading rounds under (or over) which a unique equilibrium exists (or multiple equilibria exist) for a sufficiently low probability of informed trading. We characterize and compute tame equilibria. Further, we provide a necessary and sufficient condition under which manipulation arises. We contend that we can extend our analysis to a continuous-time setting and thereby provide a reference framework in a discrete-time setting with a unique equilibrium.
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Bibliographic InfoPaper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 492.
Date of creation: 16 Oct 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-25 (All new papers)
- NEP-MIC-2013-10-25 (Microeconomics)
- NEP-MST-2013-10-25 (Market Microstructure)
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