Price Manipulation, Dynamic Informed Trading, and the Uniqueness of Equilibrium in Sequential Trading

Shino Takayama ()

No 621, Discussion Papers Series from University of Queensland, School of Economics

Abstract: We study the manipulation of prices in a dynamic version of the Glosten and Milgrom (1985) model with a long-lived informed trader. The conditions under which a unique equilibrium exists are clarified. We show that within the unique equilibrium, bid and ask prices are monotonically increasing functions of the market maker’s belief, and we characterize the situations in which this equilibrium involves manipulation of prices by the informed trader. Finally, we describe a computational method to find equilibria in the model, and give simulation results that confirm and extend our theoretical findings.

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: 2020-05-05
New Economics Papers: this item is included in nep-des, nep-gth, nep-mic, nep-mst and nep-ore
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Journal Article: Price manipulation, dynamic informed trading, and the uniqueness of equilibrium in sequential trading (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:621

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