SSE/EFI Working Paper Series in Economics and Finance
Introducing a spread into the Kyle model
Abstract: The Kyle (1985) model is extended to take into account
market maker competition and the spread. It is shown that with a spread the
Kyle model has a Nash equilibrium also with two market makers, not only
with three or more, as shown in earlier research. The spread is
endogenized, and two testable predictions of the model are generated. The
first is that the spread is increasing in the standard deviation of the
fundamentals. The second is that it is independent of the standard
deviation of noise trades.
Keywords: market microstructure; spread; market maker; (follow links to similar papers)
JEL-Codes: D53; D82; G12; G14; (follow links to similar papers)
27 pages, March 11, 2009
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