Premium
On the Existence of Linear Equilibria in Models of Market Making
Author(s) -
Bagnoli Mark,
Viswanathan S.,
Holden Craig
Publication year - 2001
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/1467-9965.00106
Subject(s) - order (exchange) , mathematical economics , economics , aggregate (composite) , econometrics , type (biology) , linear model , competitive equilibrium , mathematics , statistics , ecology , materials science , finance , composite material , biology
We derive necessary and sufficient conditions for a linear equilibrium in three types of competitive market making models: Kyle type models (when market makers only observe aggregate net order flow), Glosten–Milgrom and Easley–O'Hara type models (when market makers observe and trade one order at a time), and call markets models (individual order models when market makers observe a number of orders before pricing and executing any of them). We study two cases: when privately informed (strategic) traders are symmetrically informed and when they have differential information. We derive necessary and sufficient conditions on the distributions of the random variables for a linear equilibrium. We also explore those features of the equilibrium that depend on linearity as opposed to the particular distributional assumptions and we provide a large number of examples of linear equilibria for each of the models.