Asymptotic Glosten Milgrom Equilibrium

35 Pages Posted: 19 Oct 2013 Last revised: 24 Apr 2014

See all articles by Cheng Li

Cheng Li

London School of Economics & Political Science (LSE)

Hao Xing

Boston University - Questrom School of Business

Date Written: October 18, 2013

Abstract

This paper studies the Glosten Milgrom model whose risky asset value admits an arbitrary discrete distribution. Contrast to existing results on insider's models, the insider's optimal strategy in this model, if exists, is not of feedback type. Therefore a weak formulation of equilibrium is proposed. In this weak formulation, the inconspicuous trade theorem still holds, but the optimality for the insider's strategy is not enforced. However, the insider can employ some feedback strategy whose associated expected profit is close to the optimal value, when the order size is small. Moreover this discrepancy converges to zero when the order size diminishes. The existence of such a weak equilibrium is established, in which the insider's strategy converges to the Kyle optimal strategy when the order size goes to zero.

Keywords: Glosten Milgrom model, Kyle model, nonexistence, occupation time, weak convergence

JEL Classification: G14, C61

Suggested Citation

Li, Cheng and Xing, Hao, Asymptotic Glosten Milgrom Equilibrium (October 18, 2013). Available at SSRN: https://ssrn.com/abstract=2342136 or http://dx.doi.org/10.2139/ssrn.2342136

Cheng Li

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Hao Xing (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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