Price Manipulation, Dynamic Informed Trading and Tame Equilibria: Theory and Computation
Shino Takayama ()
No 603, Discussion Papers Series from University of Queensland, School of Economics
This paper studies the manipulation of prices by using a dynamic version of the Glosten and Milgrom (1985) model with a long-lived informed trader. We make a fundamental contribution by clarifying the conditions under which a unique equilibrium exists, and in what situations this equilibrium involves manipulation of prices by the informed trader. Furthermore, within the unique equilibrium, we characterize bidâ€“ask spreads and show that bid and ask prices are monotonically increasing in the market makerâ€™s prior belief. Finally, we propose a computational method to find equilibria in the model. Our simulation results confirm our theoretical findings and find multiple equilibria in some cases.
Keywords: Market microstructure; Glostenâ€“Milgrom; Insider trading; Dynamic trading; Price formation; Sequential trade; Asymmetric information; Bidâ€“ask spreads. (search for similar items in EconPapers)
JEL-codes: D82 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-mic and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:603
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