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Strategic Insider Trading Equilibrium with a non-fiduciary market maker

Aase, Knut K.; Øksendal, Bernt
Working paper
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URI
http://hdl.handle.net/11250/2611566
Date
2019-08-28
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  • Discussion papers (FOR) [509]
Abstract
The continuous-time version of Kyle's (1985) model is studied, in which market makers are not fiduciaries. They have some market power which they utilize to set the price to their advantage, resulting in positive expected profits. This has several implications for the equilibrium, the most important being that by setting a modest fee conditional of the order ow, the market maker is able to obtain a profit of the order of magnitude, and even better than, a perfectly informed insider. Our model also indicates why speculative prices are more volatile than predicted by fundamentals.
Publisher
FOR
Series
Discussion paper;2/19

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