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Is Kyle’s equilibrium model stable?

Author

Listed:
  • Umut Çetin

    (London School of Economics and Political Science)

  • Kasper Larsen

    (Rutgers University)

Abstract

In the dynamic discrete-time trading setting of Kyle (Econometrica 53:1315–1336, 1985), we prove that Kyle’s equilibrium model is stable when there are one or two trading times. For three or more trading times, we prove that Kyle’s equilibrium is not stable. These theoretical results are proven to hold irrespectively of all Kyle’s input parameters.

Suggested Citation

  • Umut Çetin & Kasper Larsen, 2024. "Is Kyle’s equilibrium model stable?," Mathematics and Financial Economics, Springer, volume 18, number 3, February.
    • Handle: RePEc:spr:mathfi:v:18:y:2024:i:4:d:10.1007_s11579-024-00364-0
    DOI: 10.1007/s11579-024-00364-0
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    References listed on IDEAS

    as
    1. Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2015. "Equilibrium fast trading," Journal of Financial Economics, Elsevier, vol. 116(2), pages 292-313.
    2. Alex Boulatov & Dan Bernhardt, 2015. "Robustness of equilibrium in the Kyle model of informed speculation," Annals of Finance, Springer, vol. 11(3), pages 297-318, November.
    3. Peter M. DeMarzo & Ron Kaniel & Ilan Kremer, 2008. "Relative Wealth Concerns and Financial Bubbles," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 19-50, January.
    4. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-1037, September.
    5. Back, Kerry E., 2017. "Asset Pricing and Portfolio Choice Theory," OUP Catalogue, Oxford University Press, number 9780190241148.
    6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    7. Stauber, Ronald, 2011. "Knightian games and robustness to ambiguity," Journal of Economic Theory, Elsevier, vol. 146(1), pages 248-274, January.
    Full references (including those not matched with items on IDEAS)

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