On the Equivalence of Noise Trader and Hedger Models in Market Microstructure

Posted: 23 Dec 1999

See all articles by Asani Sarkar

Asani Sarkar

Federal Reserve Bank of New York

Abstract

It is shown that the models of Spiegel and Subrahmanyam (1992, Review of Financial Studies 5(2), 307-329) and Kyle (1985, Econometrica 53, 1315-1335) are equivalent in the following sense: the equilibrium values of market depth, the expected total trading volume and the expected price level are the same in the two models. Equivalence exists whenever the uniformed traders hedge all of their endowments of risky shares. This occurs under two sets of parameter configurations. In both cases, the linear equilibrium in the hedger model always exists.

JEL Classification: D82, G12, G14

Suggested Citation

Sarkar, Asani, On the Equivalence of Noise Trader and Hedger Models in Market Microstructure. Available at SSRN: https://ssrn.com/abstract=5758

Asani Sarkar (Contact Author)

Federal Reserve Bank of New York ( email )

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