Arrow-Debreu Meets Kyle
45 Pages Posted: 13 Jun 2021 Last revised: 12 Aug 2022
Date Written: June 7, 2021
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: Suggested Citation