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 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.
|Date of creation:||16 Oct 2013|
|Date of revision:|
|Contact details of provider:|| Postal: St. Lucia, Qld. 4072|
Phone: +61 7 3365 6570
Fax: +61 7 3365 7299
Web page: http://www.uq.edu.au/economics/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruno Biais & David Martimort & Jean-Charles Rochet, 2000.
"Competing Mechanisms in a Common Value Environment,"
Econometric Society, vol. 68(4), pages 799-838, July.
- Biais, Bruno & Martimort, David & Rochet, Jean-Charles, 1998. "Competing Mechanisms in a Commun Value Environment," IDEI Working Papers 75, Institut d'Économie Industrielle (IDEI), Toulouse.
- Markus K. Brunnermeier & Lasse Heje Pederson, 2003.
LSE Research Online Documents on Economics
24829, London School of Economics and Political Science, LSE Library.
- Lasse H. Pedersen & Markus Brunnermeier, 2004. "Predatory Trading," Econometric Society 2004 North American Winter Meetings 425, Econometric Society.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2004. "Predatory Trading," NBER Working Papers 10755, National Bureau of Economic Research, Inc.
- Brunnermeier, Markus K & Pedersen, Lasse Heje, 2004. "Predatory Trading," CEPR Discussion Papers 4639, C.E.P.R. Discussion Papers.
- Markus K Brunnermeier & Lasse Heje Pederson, 2003. "Predatory Trading," FMG Discussion Papers dp441, Financial Markets Group.
- Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
- Glosten, Lawrence R. & Milgrom, Paul R., 1985.
"Bid, ask and transaction prices in a specialist market with heterogeneously informed traders,"
Journal of Financial Economics,
Elsevier, vol. 14(1), pages 71-100, March.
- Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Bernard De Meyer, 2007.
"Price Dynamics on a Stock Market with Asymmetric Information,"
Cowles Foundation Discussion Papers
1604, Cowles Foundation for Research in Economics, Yale University.
- De Meyer, Bernard, 2010. "Price dynamics on a stock market with asymmetric information," Games and Economic Behavior, Elsevier, vol. 69(1), pages 42-71, May.
- Bernard De Meyer, 2007. "Price Dynamics on a Stock Market with Asymmetric Information," Levine's Bibliography 321307000000000841, UCLA Department of Economics.
- Mikhail Golosov & Guido Lorenzoni & Aleh Tsyvinski, 2009.
"Decentralized Trading with Private Information,"
NBER Working Papers
15513, National Bureau of Economic Research, Inc.
- Tālis J. Putniņš, 2012. "Market Manipulation: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 952-967, December.
- Jordan, Bradford D. & Jordan, Susan D., 1996. "Salomon brothers and the May 1991 Treasury auction: Analysis of a market corner," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 25-40, January.
- Archishman Chakraborty & Bilge Yilmaz, .
Rodney L. White Center for Financial Research Working Papers
7-00, Wharton School Rodney L. White Center for Financial Research.
- Archishman Chakraborty & Bilge Yilmaz, . "Informed Manipulation," Rodney L. White Center for Financial Research Working Papers 07-00, Wharton School Rodney L. White Center for Financial Research.
- Back, Kerry, 1992. "Insider Trading in Continuous Time," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 387-409.
- Pierre Collin-Dufresne & Vyacheslav Fos, 2012. "Insider Trading, Stochastic Liquidity and Equilibrium Prices," NBER Working Papers 18451, National Bureau of Economic Research, Inc.
- Calcagno, Riccardo & Lovo, Stefano M., 1998. "Bid-Ask Price Competition with Asymmetric Information between Market Makers," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1998012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Allen, Franklin & Gorton, Gary, 1992.
"Stock price manipulation, market microstructure and asymmetric information,"
European Economic Review,
Elsevier, vol. 36(2-3), pages 624-630, April.
- Franklin Allen & Gary Gorton, 1991. "Stock Price Manipulation, Market Microstructure and Asymmetric Information," NBER Working Papers 3862, National Bureau of Economic Research, Inc.
- Allen, F. & Gorton, G., 1991. "Stock Price Manipulation, Market Microstructure and Asymetric Information," Weiss Center Working Papers 21-91, Wharton School - Weiss Center for International Financial Research.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- 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.
- Gur Huberman & Werner Stanzl, 2004. "Price Manipulation and Quasi-Arbitrage," Econometrica, Econometric Society, vol. 72(4), pages 1247-1275, 07.
- Ozsoylev, Han N. & Takayama, Shino, 2010.
"Price, trade size, and information revelation in multi-period securities markets,"
Journal of Financial Markets,
Elsevier, vol. 13(1), pages 49-76, February.
- Shino Takayama & Han Ozsoylev, 2005. "Price, Trade Size, and Information Revelation in Multi-Period Securities Markets," Finance 0510031, EconWPA.
- Han N. Ozsoylev & Shino Takayama, 2005. "Price, Trade Size, and Information Revelation in Multi-Period Securities Markets," OFRC Working Papers Series 2005fe10, Oxford Financial Research Centre.
- Han N. Ozsoylev & Shino Takayama, 2005. "Price, Trade Size, and Information Revelation in Multi-Period Securities Markets," Economics Series Working Papers 2005-FE-10, University of Oxford, Department of Economics.
- Krinsky, Itzhak & Lee, Jason, 1996. " Earnings Announcements and the Components of the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 51(4), pages 1523-35, September.
- Merrick, John Jr & Naik, Narayan Y. & Yadav, Pradeep K., 2005. "Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze," Journal of Financial Economics, Elsevier, vol. 77(1), pages 171-218, July.
- Vitale, Paolo, 2000.
"Speculative noise trading and manipulation in the foreign exchange market,"
Journal of International Money and Finance,
Elsevier, vol. 19(5), pages 689-712, October.
- Vitale, P., 1997. "Speculative Noise Trading and Manipulation in the Foreign Exchange Market," Economics Working Papers eco97/23, European University Institute.
- repec:oup:restud:v:73:y:2006:i:2:p:329-355 is not listed on IDEAS
- Felixson, Karl & Pelli, Anders, 1999. "Day end returns--stock price manipulation," Journal of Multinational Financial Management, Elsevier, vol. 9(2), pages 95-127, March.
- Shino Takayama, 2010. "A dynamic strategy of the informed trader with market manipulation," Annals of Finance, Springer, vol. 6(2), pages 287-294, March.
- Koski, Jennifer Lynch & Michaely, Roni, 2000. "Prices, Liquidity, and the Information Content of Trades," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 659-96.
- Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 745-81, July.
- I. Krinsky & J. Lee, 1996. "Earning Announcements and the Components of the Bid-Ask Aspread," Quantitative Studies in Economics and Population Research Reports 313, McMaster University.
When requesting a correction, please mention this item's handle: RePEc:qld:uq2004:492. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (SOE IT)
If references are entirely missing, you can add them using this form.