Kyle’s model with stochastic liquidity

Ibrahim Ekren (), Brad Mostowski () and Gordan Žitković ()
Additional contact information
Ibrahim Ekren: University of Michigan
Brad Mostowski: Florida State University
Gordan Žitković: The University of Texas at Austin

Finance and Stochastics, 2025, vol. 29, issue 4, No 7, 1195-1231

Abstract: Abstract We construct an equilibrium for the continuous-time Kyle model with stochastic liquidity, a general distribution of the fundamental price, and correlated stock and volatility dynamics. For distributions with positive support, our equilibrium allows us to study the impact of the stochastic volatility of noise trading on the volatility of the asset. In particular, when the fundamental price is lognormally distributed, informed trading forces the log-return up to maturity to be Gaussian for any choice of noise-trading volatility even though the price process itself comes with stochastic volatility. Surprisingly, we find that in equilibrium both Kyle’s Lambda and its inverse (the market depth) are submartingales.

Keywords: Kyle model; Asymmetric information; Liquidity; Price impact; Market depth; Stochastic volatility; 60H30; 60J60; 91B44 (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s00780-025-00574-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:finsto:v:29:y:2025:i:4:d:10.1007_s00780-025-00574-4

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-025-00574-4

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().