Arrow-Debreu Meets Kyle

45 Pages Posted: 13 Jun 2021 Last revised: 5 Jul 2022

See all articles by Christian Keller

Christian Keller

University of Central Florida

Michael Tseng

University of Central Florida

Date Written: June 7, 2021

Abstract

We extend the Kyle (1985) setting to an Arrow-Debreu economy with information asymmetry regarding Arrow-Debreu state probabilities. Equivalently, the informed agent has private information regarding arbitrary aspects of the payoff distribution of an underlying asset and trades a complete menu of options. No parametric assumption is made on the possible payoff distributions or the nature of private information. We characterize the informed demand, information efficiency of Arrow-Debreu prices, and price impact within and across Arrow-Debreu markets. Information asymmetry regarding higher moments is a special case, where informed demand recovers corresponding options trading strategies used in practice, such as volatility straddle.





Keywords: Arrow-Debreu Markets; Options; Price Discovery; Volatility Straddle.

JEL Classification: C61, G13, G14.

Suggested Citation

Keller, Christian and Tseng, Michael, Arrow-Debreu Meets Kyle (June 7, 2021). Available at SSRN: https://ssrn.com/abstract=3862047 or http://dx.doi.org/10.2139/ssrn.3862047

Christian Keller

University of Central Florida

4000 Central Florida Blvd
Orlando, FL 32816-1400
United States

Michael Tseng (Contact Author)

University of Central Florida ( email )

4000 Central Florida Blvd
Orlando, FL 32816-1400
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
60
Abstract Views
680
PlumX Metrics