Robustness of equilibrium in the Kyle model of informed speculation

Alexei Boulatov and Dan Bernhardt

Annals of Finance, 2015, vol. 11, issue 3, 297-318

Abstract: We analyze a static Kyle (Continuous auctions and insider trading. Princeton University, Princeton, 1983 ) model in which a risk-neutral informed trader can use arbitrary (linear or non-linear) deterministic strategies, and a finite number of market makers can use arbitrary pricing rules. We establish a strong sense in which the linear Kyle equilibrium is robust: the first variation in any agent’s expected payoff with respect to a small variation in his conjecture about the strategies of others vanishes at equilibrium. Thus, small errors in a market maker’s beliefs about the informed speculator’s trading strategy do not reduce his expected payoffs. Therefore, the original equilibrium strategies remain optimal and still constitute an equilibrium (neglecting the higher-order terms). We also establish that if a non-linear equilibrium exists, then it is not robust. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Market microstructure; Informed speculation; Bayesian Nash equilibrium; Uniqueness; Robustness; Information; G12; G14; C62 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10436-015-0264-2

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