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A Stationary Kyle Setup: Microfounding propagator models

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  • Michele Vodret
  • Iacopo Mastromatteo
  • Bence T'oth
  • Michael Benzaquen

Abstract

We provide an economically sound micro-foundation to linear price impact models, by deriving them as the equilibrium of a suitable agent-based system. Our setup generalizes the well-known Kyle model, by dropping the assumption of a terminal time at which fundamental information is revealed so to describe a stationary market, while retaining agents' rationality and asymmetric information. We investigate the stationary equilibrium for arbitrary Gaussian noise trades and fundamental information, and show that the setup is compatible with universal price diffusion at small times, and non-universal mean-reversion at time scales at which fluctuations in fundamentals decay. Our model provides a testable relation between volatility of prices, magnitude of fluctuations in fundamentals and level of volume traded in the market.

Suggested Citation

  • Michele Vodret & Iacopo Mastromatteo & Bence T'oth & Michael Benzaquen, 2020. "A Stationary Kyle Setup: Microfounding propagator models," Papers 2011.10242, arXiv.org, revised Feb 2021.
    • Handle: RePEc:arx:papers:2011.10242
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    References listed on IDEAS

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    Cited by:

    1. Francesco Cordoni & Fabrizio Lillo, 2022. "Transient impact from the Nash equilibrium of a permanent market impact game," Papers 2205.00494, arXiv.org, revised Mar 2023.
    2. Michele Vodret & Iacopo Mastromatteo & Bence T'oth & Michael Benzaquen, 2021. "Do fundamentals shape the price response? A critical assessment of linear impact models," Papers 2112.04245, arXiv.org.
    3. Michele Vodret & Bence Tóth & Iacopo Mastromatteo & Michael Benzaquen, 2022. "Do fundamentals shape the price response? A critical assessment of linear impact models," Post-Print hal-03797375, HAL.
    4. Michele Vodret & Iacopo Mastromatteo & Bence Tóth & Michael Benzaquen, 2023. "Microfounding GARCH models and beyond: a Kyle-inspired model with adaptive agents," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 599-625, July.

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