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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

Abstract: 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 bid–ask spreads and show that bid and ask prices are monotonically increasing in the market maker’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; Glosten–Milgrom; Insider trading; Dynamic trading; Price formation; Sequential trade; Asymmetric information; Bid–ask spreads. (search for similar items in EconPapers)
JEL-codes: D82 G12 (search for similar items in EconPapers)
Date: 2018-10-02
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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