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Price Manipulation, Dynamic Informed Trading, and the Uniqueness of Equilibrium in Sequential Trading

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  • Shino Takayama

    (School of Economics, University of Queensland)

Abstract

We study the manipulation of prices in a dynamic version of the Glosten and Milgrom (1985) model with a long-lived informed trader. The conditions under which a unique equilibrium exists are clarified. We show that within the unique equilibrium, bid and ask prices are monotonically increasing functions of the market maker’s belief, and we characterize the situations in which this equilibrium involves manipulation of prices by the informed trader. Finally, we describe a computational method to find equilibria in the model, and give simulation results that confirm and extend our theoretical findings.

Suggested Citation

  • Shino Takayama, 2020. "Price Manipulation, Dynamic Informed Trading, and the Uniqueness of Equilibrium in Sequential Trading," Discussion Papers Series 621, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:621
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    More about this item

    Keywords

    Market microstructure; Glosten–Milgrom; Insider trading; Dynamic trading; Price formation; Sequential trade; Asymmetric information; Bid–ask spreads.;
    All these keywords.

    JEL classification:

    • 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

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