Introducing a spread into the Kyle model

Marcus Salomonsson ()
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Marcus Salomonsson: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

No 713, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: The Kyle (1985) model is extended to take into account market maker competition and the spread. It is shown that with a spread the Kyle model has a Nash equilibrium also with two market makers, not only with three or more, as shown in earlier research. The spread is endogenized, and two testable predictions of the model are generated. The first is that the spread is increasing in the standard deviation of the fundamentals. The second is that it is independent of the standard deviation of noise trades.

Keywords: market microstructure; spread; market maker (search for similar items in EconPapers)
JEL-codes: D53 D82 G12 G14 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2009-03-11
New Economics Papers: this item is included in nep-mst
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