A stationary Kyle setup: microfounding propagator models

DOI10.1088/1742-5468/ABE702MaRDI QIDQ4992316zbMATH OpenFDO

Authors Michele Vodret, Iacopo Mastromatteo, Michael Benzaquen, Bence Tóth

Publication date 8 June 2021

Published in Journal of Statistical Mechanics: Theory and Experiment (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2011.10242

zbMATH Keywords

agent-based modelsmarket impactmarket microstructuremodels of financial marketsquantitative finance

Mathematics Subject Classification ID

Financial markets (91G15)

Abstract: We provide an economically sound micro-foundation to linear price impact models, by deriving them as the equilibrium of a suitable agent-based system. Our setup generalizes the well-known Kyle model, by dropping the assumption of a terminal time at which fundamental information is revealed so to describe a stationary market, while retaining agents' rationality and asymmetric information. We investigate the stationary equilibrium for arbitrary Gaussian noise trades and fundamental information, and show that the setup is compatible with universal price diffusion at small times, and non-universal mean-reversion at time scales at which fluctuations in fundamentals decay. Our model provides a testable relation between volatility of prices, magnitude of fluctuations in fundamentals and level of volume traded in the market.

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Cites work

• A fully consistent, minimal model for nonlinear market impact
• Continuous Auctions and Insider Trading
• Continuous auctions and insider trading: uniqueness and risk aversion
• Excess Volatility and Predictability of Stock Prices in Autoregressive Dividend Models with Learning
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• Financial equilibrium with asymmetric information and random horizon
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• Linear models for the impact of order flow on prices. I. History dependent impact models
• Machine learning. A probabilistic perspective
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Cited in

(3)

• The multivariate Kyle model: more is different
• Do fundamentals shape the price response? A critical assessment of linear impact models
• Transient impact from the Nash equilibrium of a permanent market impact game

Describes a project that uses

Uses Software

• PMTK

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