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Title:Introducing a spread into the Kyle model PDF Logo
Authors:Salomonsson, Marcus
Issue Date:2009
Series/Report no.:SSE/EFI Working Paper Series in Economics and Finance 713
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.
Subjects:market microstructure
spread
market maker
JEL:D53
D82
G12
G14
Document Type:Working Paper
Appears in Collections:SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics

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