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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 713:
Introducing a spread into the Kyle model

Marcus Salomonsson ()

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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