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Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation

This 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 “tame†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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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 492.

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Date of creation: 16 Oct 2013
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Handle: RePEc:qld:uq2004:492
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  21. Riccardo Calcagno & Stefano Lovo, 2006. "Bid-Ask Price Competition with Asymmetric Information between Market-Makers," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 329-355.
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  24. Felixson, Karl & Pelli, Anders, 1999. "Day end returns--stock price manipulation," Journal of Multinational Financial Management, Elsevier, vol. 9(2), pages 95-127, March.
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  26. Jarrow, Robert A., 1992. "Market Manipulation, Bubbles, Corners, and Short Squeezes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 311-336, September.
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