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Strategic commitment by an informed speculator

Author

Listed:
  • Bernhardt, Dan

    (University of Illinois and University of Warwick)

  • Boulatov, Alex

    (International College of Economics and Finance, Moscow,)

Abstract

We analyze speculation by an informed trader who can commit to her trading strategy in a Kyle-style dealership market. Market makers observe the exact parametric form of the speculator’s trading strategy but not her private information and then price competitively given the net (informed plus noise trade) order flow. We derive necessary and suffcient conditions for the speculator not to profit from commitment. This imposes conditions on model primitives satisfied by Normally-distributed uncertainty that give rise to linear equilibria, but are generically not satisfied. With commitment the speculator may trade less aggressively after some signals, but more aggressively after others.

Suggested Citation

  • Bernhardt, Dan & Boulatov, Alex, 2025. "Strategic commitment by an informed speculator," The Warwick Economics Research Paper Series (TWERPS) 1553, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1553
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2025/twerp_1553-_bernhardt.pdf
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    References listed on IDEAS

    as
    1. Noldeke, Georg & Troger, Thomas, 2001. "Existence of linear equilibria in the Kyle model with multiple informed traders," Economics Letters, Elsevier, vol. 72(2), pages 159-164, August.
    2. Dan Bernhardt & P. Seiler & B. Taub, 2010. "Speculative dynamics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(1), pages 1-52, July.
    3. Kyung-Ha Cho & Nicole El Karoui, 2000. "Insider Trading and Nonlinear Equilibria: Single Auction Case," Annals of Economics and Statistics, GENES, issue 60, pages 21-41.
    4. Bruno Biais & Laurent Germain, 2002. "Incentive-Compatible Contracts for the Sale of Information," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 987-1003.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    6. repec:adr:anecst:y:2000:i:60:p:02 is not listed on IDEAS
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