Long-lived private information and imperfect competition

Article Abstract:

We develop a multi-period auction model in which multiple privately informed agents strategically exploit their long-lived information. We show that such traders compete aggressively and cause most of their common private information to be revealed very rapidly. In the limit as the interval between auctions approaches zero, market depth becomes infinite and all private information is revealed immediately. These results are in contrast to those of Kyle (1985) in whch the monopolistic informed trader causes his information to be incorporated into prices gradually, and, when the interval between auctions is vanishing small, market depth is constant over time. (Reprinted by permission of the publisher.)

Prices and rates, Stocks, Stock prices

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Market orders and market efficiency

Article Abstract:

This work compares a dealer market and a limit-order book. Dealers commonly observe order flow and collect information from multiple market orders. They may be better informed than other traders, although they do not earn rents from this information. Dealers earn rents as suppliers of liquidity, and their decisions to enter or exit the market are independent of the degree of adverse selection. Introduction of a limit-order book lowers the execution-price risk faced by speculators and leads them to trade more aggressively on their information. Introduction of the book also lowers dealer profits, but increases the informational efficiency of prices. (Reprinted by permission of the publisher.)

Economics, Information theory, Efficient market theory, Information theory in economics

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Option replication in discrete time with transaction costs

Article Abstract:

Option replication is dicussed in a discrete-time framework with transaction costs. The model represents an extension of the Cox-Ross-Rubenstein binomial option pricing model to cover the case of proportional transaction costs. The method proceeds by constructing the appropriate replicating portfolio at each trading interval. Numerical values of these prices are presented for a range of parameter values. The paper derives a simple Black-Scholes types approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values. (Reprinted by permission of the publisher.)

Models, Stock options

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