Arrow-Debreu Meets Kyle: Price Discovery Across Derivatives

Christian Keller and Michael C. Tseng

Papers from arXiv.org

Abstract: We study price discovery in a model where an informed agent has arbitrary private information about state probabilities and trades state-contingent claims. The model unifies the key elements of Arrow-Debreu (1954) and Kyle (1985). When the claims are options, the informed agent has arbitrary information about the underlying asset's payoff distribution and trades option portfolios. Our setting provides the first equilibrium framework encompassing longstanding option-market practices and regularities, including common trading strategies and the volatility smile across strikes.

Date: 2023-02, Revised 2026-02
New Economics Papers: this item is included in nep-fmk and nep-mst
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