Class notes
ECON0001 Week 3
- Course
- Institution
In depth notes on ECON0001 Week 3
[Show more]
Seller
Follow
zctpfru
Content preview
The Kyle ModelWeek 3
FPR Ch3
Introduction
This is a framework for analysing determinants of market depth (how and why transaction prices
react to order size). In a deep market larger orders do not have a much greater impact on prices
than small orders.
Determinants:
• Asymmetric information
◦ Large orders re ect more private information than small orders, so induce larger price
movements
◦ Sensitivity of price to trade size is determined by the degree of asymmetric information
◦ Greater asymmetry —> Shallower market
• Risk aversion of liquidity providers
◦ Filling a large order exposes them to greater inventory risk , so the more risk averse they are,
the large price concessions they require to execute trades
◦ As orders may be absorbed by multiple providers, market depth depends on their aggregate
risk bearing capacity and their number
• Rents due to imperfect competition among market makers
◦ Liquidity provider’s market power is inversely related to their number
◦ ↑ no. providers —> ↑ maket depth
Vs. Glosten and Milgrom
• Under the Milgrom model the spread is due to adverse selection or equivalently gaining
information
• It’s assumptions are that informed traders are
◦ Myopic, they are only allowed to trade once
◦ Can only buy/ sell one unit of the asset
◦ Informationally large, they know the security value payo but do not realise the impact of
their orders on the price
• Assumptions shared
◦ Informed and uninformed traders
‣ G and M- trader faced either informed or uninformed
‣ Kyle- orders from both types are batched together
One period Kyle model
traderdoesn'tsee
neededasinformed
ASSUMPTIONS
realisedorder trader
noise
from
I
Riskysecurity w terminalvalue v u NIi o
Xv ofsingleriskneutralstrategicspeculatorwhoknows v
marketo rder
UnNlo o marketo rder noisetradersystematicallyonthewrongsideofthemarket NPmarketordersonlynotlimit
of
w Xlvto o rder
aggregate
uItv
marketmakers
areriskneutral
setasin
price GAM
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller zctpfru. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.68. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
79976 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now