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Strategic Insider Trading Equilibrium with a Non-fiduciary Market Maker

Authors :
Aase, Knut
Øksendal, Bernt
Publication Year :
2019

Abstract

The continuous-time version of Kyle's (1985) model is studied, in which market makers are not fiduciaries. They have some market power which they utilize to set the price to their advantage, resulting in positive expected profits. This has several implications for the equilibrium, the most important being that by setting a modest fee conditional of the order flow, the market maker is able to obtain a profit of the order of magnitude, and even better than, a perfectly informed insider. Our model also indicates why speculative prices are more volatile than predicted by fundamentals.

Details

Database :
arXiv
Publication Type :
Report
Accession number :
edsarx.1908.08777
Document Type :
Working Paper