Ideas:
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Kyle’s linear equilibrium model is a quantity-price adjustment model. It is not an investment model. We set up a simultaneous equations system for asset and transaction cost valuation. The asset pricing model is for price return as the investors hold the committed securities for capital or dividend gains. As the role of the risk-averse market maker is to stabilize the market, the transaction cost model allows price-quantity adjustment. As the transacted prices are also the market prices, all the market participants determine the transaction costs and investment returns by sharing their market information. A reduced-form linear regression model for the simultaneous equations system calculates the model parameters at once based on all the input and output information. In an investment model with liquidity and credit risks, the market maker's strategy on transaction costs will incorporate the investor's private information and vice versa.
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