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On the structure and existence of linear equilibria with a constrained trader

Author

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  • Kwon, Heeyoung
  • Choi, Jin Hyuk

Abstract

We study a discrete-time Kyle model with a single constrained trader, competitive market makers, and noise traders. Within the linear class, we show that any equilibrium necessarily reduces to a representation based on two state variables: the market maker’s expectation of the trader’s remaining demand and the residual demand beyond this expectation. This result implies that the equilibrium structure adopted in the continuous-time constrained trader model of Choi et al. (2023) is not a particular modeling choice, but the only linear structure consistent with equilibrium in the discrete-time analogue. We also establish the existence of a linear equilibrium in this setting.

Suggested Citation

  • Kwon, Heeyoung & Choi, Jin Hyuk, 2026. "On the structure and existence of linear equilibria with a constrained trader," Economics Letters, Elsevier, vol. 261(C).
    • Handle: RePEc:eee:ecolet:v:261:y:2026:i:c:s0165176526000479
    DOI: 10.1016/j.econlet.2026.112853
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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