On the Existence of Linear Equilibria in the Rochet-Vila Model of Market Making
16 Pages Posted: 27 Oct 2004
Date Written: October 25, 2004
This paper derives necessary and sufficient conditions for the existence of linear equilibria in the Rochet-Vila model of market making. In contrast to most previous work on the existence of linear equilibria in models of market making, we do not impose independence of the underlying random variables. For distributions that are determined by their moments we show that a linear equilibrium exists if and only if the joint distribution of noise trade and asset payoff is elliptical.
Keywords: Market making, market microstructure, linear equilibria
JEL Classification: G14, D82
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