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Financial equilibrium with asymmetric information and random horizon
We study in detail and explicitly solve the version of Kyle’s model introduced in a specific case in Back and Baruch (Econometrica 72:433–465, 2004),
where the trading horizon is given by an exponentially distributed random time. The first part of the paper is devoted to the analysis of time-homogeneous equilibria using tools from the theory of one-dimensional diffusions. It turns out that such an equilibrium is only possible if the final payoff is Bernoulli distributed as in Back and Baruch (Econometrica 72:433–465, 2004). We show in the second part that the signal the market makers use in the general case is a time-changed version of the one they would have used had the final payoff had a Bernoulli distribution. In both cases, we characterise explicitly the equilibrium price process and the optimal strategy of the informed trader. In contrast to the original Kyle model, it is found that the reciprocal
of the market’s depth, i.e., Kyle’s lambda, is a uniformly integrable supermartingale. While Kyle’s lambda is a potential, i.e., converges to 0, for the Bernoulli-distributed final payoff, its limit in general is different from 0.
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E-Jurnal
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Statement of Responsibility |
Umut Çetin
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