Linear Bayesian equilibrium in insider trading with a random time under partial observations

<abstract><p>In this paper, the insider trading model of Xiao and Zhou (<italic>Acta Mathematicae Applicatae, 2021</italic>) is further studied, in which market makers receive partial information about a static risky asset and an insider stops trading at a random time. With the help of dynamic programming principle, we obtain a unique linear Bayesian equilibrium consisting of insider's trading intensity and market liquidity parameter, instead of none Bayesian equilibrium as before. It shows that (i) as time goes by, both trading intensity and market depth increase exponentially, while residual information decreases exponentially; (ii) with average trading time increasing, trading intensity decrease, but both residual information and insider's expected profit increase, while market depth is a unimodal function with a unique minimum with respect to average trading time; (iii) the less information observed by market makers, the weaker trading intensity and market depth are, but the more both expect profit and residual information are, which is in accord with our economic intuition.</p></abstract>

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KYLE–BACK’S MODEL WITH A RANDOM HORIZON

International Journal of Theoretical and Applied Finance ◽

10.1142/s0219024918500164 ◽

2018 ◽

Vol 21 (02) ◽

pp. 1850016 ◽

Cited By ~ 2

Author(s):

JOSÉ MANUEL CORCUERA ◽

GIULIA DI NUNNO

Keyword(s):

Market Efficiency ◽

Insider Trading ◽

Continuous Time ◽

Sufficient Conditions ◽

Random Time ◽

Release Time ◽

Market Prices ◽

Market Makers ◽

Pricing Rules ◽

Fundamental Value

The continuous-time version of Kyle [(1985) Continuous auctions and insider trading, Econometrica 53 (6), 1315–1335.] developed by Back [(1992) Insider trading in continuous time, The Review of Financial Studies 5 (3), 387–409.] is studied here. In Back’s model, there is asymmetric information in the market in the sense that there is an insider having information on the real value of the asset. We extend this model by assuming that the fundamental value evolves with time and that it is announced at a future random time. First, we consider the case when the release time of information is predictable to the insider and then when it is not. The goal of the paper is to study the structure of equilibrium, which is described by the optimal insider strategy and the competitive market prices given by the market makers. We provide necessary and sufficient conditions for the optimal insider strategy under general dynamics for the asset demands. Moreover, we study the behavior of the price pressure and the market efficiency. In particular, we find that when the random time is not predictable, there can be equilibrium without market efficiency. Furthermore, for the two cases of release time and for classes of pricing rules, we provide a characterization of the equilibrium.

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A Speculative Trading Model for the Electricity Market: Based on Japan Electric Power Exchange

Energies ◽

10.3390/en12152946 ◽

2019 ◽

Vol 12 (15) ◽

pp. 2946

Author(s):

Jun Maekawa ◽

Koji Shimada

Keyword(s):

Renewable Energy ◽

Electric Power ◽

Electricity Market ◽

Renewable Energy Sources ◽

Market Liquidity ◽

Market Model ◽

Forward Markets ◽

Power Exchange ◽

Trading Model ◽

Speculative Trading

Renewable energy sources produce less environmental impact and have little marginal cost. Thus, because of these characteristics, it is desirable to disseminate it for the purpose of economic efficiency. Because of the uncertainty in the supply of renewable energy and the special feature of electricity as a good, such as merit order curve, introducing forward markets is an essential factor in a liberalized market. In European countries, which have already established several mechanisms for managing liquidity including markets with several timelines, the market liquidity invites the investor to perform some speculative action. We present a simple electric power market model to analyze the speculative actions of electricity suppliers and the price effect of such actions. Moreover, we found that the speculative action improves the inelasticity of the demand in electricity market.

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Market-makers’ supply and pricing of financial market liquidity

Economics Letters ◽

10.1016/s0165-1765(02)00029-0 ◽

2002 ◽

Vol 76 (1) ◽

pp. 53-58 ◽

Cited By ~ 18

Author(s):

Pu Shen ◽

Ross M. Starr

Keyword(s):

Financial Market ◽

Market Liquidity ◽

Market Makers

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Stackelberg financial-leader in insider trading model

International Review of Economics & Finance ◽

10.1016/j.iref.2007.09.002 ◽

2009 ◽

Vol 18 (1) ◽

pp. 123-131 ◽

Cited By ~ 17

Author(s):

Leonard F.S. Wang ◽

Ya-Chin Wang ◽

Shuang Ren

Keyword(s):

Insider Trading ◽

Trading Model

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The effect of the introduction of market makers on stock liquidity: evidence from the Brazilian stock market

REVISTA AMBIENTE CONTÁBIL - Universidade Federal do Rio Grande do Norte - ISSN 2176-9036 ◽

10.21680/2176-9036.2021v13n2id25722 ◽

2021 ◽

Vol 13 (2) ◽

Author(s):

Gabriel Augusto de Carvalho ◽

João Eduardo Ribeiro ◽

Laíse Ferraz Correia

Keyword(s):

Stock Market ◽

Confidence Level ◽

Trading Volume ◽

Stock Exchange ◽

Structural Break ◽

Market Liquidity ◽

Market Makers ◽

Turnover Ratio ◽

Before And After ◽

Structural Break Test

Purpose: This study aimed to analyze whether the introduction of market makers as specialized intermediaries in the trading of stocks listed on the Brazilian stock exchange is a useful procedure for increasing the market liquidity of these assets. Methodology: The Chow structural break test was performed in the time series of the liquidity proxies, average spread, turnover ratio, and financial volume on a sample of 55 stocks. We chose to consider data in the window of 260 days before and after the start of the market maker's activity, because it represents the approximate number of trading sessions in a year, and to avoid erroneous conclusions due to the volatility of the Brazilian stock market. Results: The results showed with a 99% confidence level that after the introduction of market makers, (i) 67% of the stocks analyzed had abrupt and statistically significant changes in the average spread; (ii) 47% in the turnover ratio; and (iii) 60% had changes in the volume transactions. At the confidence level of 95%, (i) 76% of the stocks analyzed showed abrupt changes in the average spread; (ii) 65% had changes in turnover; (iii) and 69% had changes in the trading volume. Using a lower confidence level of 90%, the results revealed 85% of the stocks had abrupt and statistically significant changes in the average spread, 78% in the turnover ratio, and 73% in the trading volume. Contributions of the Study: This paper provides strong evidence on the performance of market makers and the influence they have on the market liquidity of stocks traded on the Brazilian stock exchange. We found that contracting market makers increase market liquidity and contribute significantly to the assets’ transactions.

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Another Look: The Impact of Multi-Dimensional Corporate Transparency on US Firms’ Market Liquidity and Analyst Forecast Properties

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091519500085 ◽

2019 ◽

Vol 22 (02) ◽

pp. 1950008 ◽

Cited By ~ 1

Author(s):

D. G. DeBoskey ◽

Peter R. Gillett

Keyword(s):

Earnings Quality ◽

Market Liquidity ◽

Quality Information ◽

Analyst Forecast ◽

Forecast Dispersion ◽

Information Transparency ◽

Corporate Transparency ◽

Market Depth ◽

The Impact ◽

Bid Ask Spreads

Using a multi-dimensional model of corporate transparency developed by DeBoskey and Gillett (2011) based on disclosure information, intermediary information, earnings quality information, and insider information, this study extends their findings to examine whether corporate transparency has significant power to explain cross-sectional variation in market liquidity (measured by bid-ask spreads and market depth) and analyst forecast properties (measured by analyst forecast accuracy and analyst forecast dispersion). We find that: (i) market depth and analyst forecast dispersion are significantly associated with public disclosure information transparency; (ii) market depth, forecast dispersion and forecast error are significantly associated with intermediary information transparency; and (iii) relative bid-ask spreads is signficantly associated with earnings quality information. Our findings offer an extended view of the impact of corporate transparency on a set of criterion variables expanded beyond firm-level ones to include market participants such as dealers/specialists who rely to some extent on company-provided information.

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Ethical and Political-Economic Dimensions and Potential Reforms of the Hybrid Leveraged, High Frequency, Artificial Intelligence Trading Model

Business and Professional Ethics Journal ◽

10.5840/bpej2021323110 ◽

2021 ◽

Vol 40 (2) ◽

pp. 189-222

Author(s):

Richard P. Nielsen ◽

Keyword(s):

Artificial Intelligence ◽

High Frequency ◽

Ethical Issues ◽

Hedge Fund ◽

Capital Allocation ◽

Market Liquidity ◽

Shared Responsibility ◽

Trading Model ◽

Political Economic ◽

Finance Capitalism

The average annual profits before fees of the $10 billion plus Renaissance Technologies’ hybrid Medallion “Leveraged, High Frequency, Artificial Intelligence (LHFAI)” trading hedge fund between 1988 and 2019 were about 66 percent. Total trading profits during this period were over $100 billion. The fund has never had a losing year. The fund is not open to the general public. First, distinctions among, in more or less historical order, the traditional market-maker trading model, the hedge fund trading model, the artificial intelligence trading model, and the hybrid LHFAI trading model are discussed. Second, the micro components of the LHFAI trading model are explained in the context of Renaissance Technologies’ Medallion Fund. Third, key positive contributions of the model with respect to profitability, low annual volatility, market liquidity, and intellectual property development; negative ethical issues concerning exclusive access, tax fairness, financial transparency, shared responsibility for losses and systemic risk, and short vs. long-term capital allocation are discussed. Potential reforms that retain the positives, reduce the negatives, and that could positively transform the model are discussed. Fourth, potential impacts that the potential reforms might have on the macro LHFAI form of finance capitalism and the larger finance capitalism political-economic system are considered. Fifth, conclusions are offered and discussed.

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Who Acquires Information in Dealer Markets?

The American Economic Review ◽

10.1257/aer.20170690 ◽

2020 ◽

Vol 110 (4) ◽

pp. 1145-1176

Author(s):

Jesper Rüdiger ◽

Adrien Vigier

Keyword(s):

Information Acquisition ◽

Price Discovery ◽

Market Liquidity ◽

Strategic Complementarity ◽

Market Makers ◽

Dealer Markets ◽

Informed Traders ◽

The Cost ◽

Equilibrium Pattern

We study information acquisition in dealer markets. We first identify a one-sided strategic complementarity in information acquisition: the more informed traders are, the larger market makers’ gain from becoming informed. When quotes are observable, this effect in turn induces a strategic complementarity in information acquisition amongst market makers. We then derive the equilibrium pattern of information acquisition and examine the implications of our analysis for market liquidity and price discovery. We show that increasing the cost of information can decrease market liquidity and improve price discovery. (JEL O82, O83, G14)

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