A continuous-time Kyle model with price-responsive traders

Eunjung Noh

Papers from arXiv.org

Abstract: Classical Kyle-type models of informed trading typically treat noise trader demand as purely exogenous. In reality, many market participants react to price movements and news, generating feedback effects that can significantly alter market dynamics. This paper develops a continuous-time Kyle framework in which two types of price-responsive traders (momentum and contrarian traders) adjust their demand in response to price signals. This extension yields a finite-dimensional Kalman filter for price discovery and leads to a forward-backward Riccati system characterizing equilibrium. We show that when feedback is weak, equilibrium exists and is unique as a smooth perturbation of the classical Kyle solution, allowing us to derive explicit comparative statics for insider profits and price informativeness. For stronger feedback, the model generates rich dynamics, including potential multiplicity of equilibria and amplification effects. Our framework thus bridges the gap between purely exogenous noise and more realistic, behaviorally motivated trading.

Date: 2026-01
New Economics Papers: this item is included in nep-mst
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2601.09872 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2601.09872

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().