By Lawrence R. Glosten and Paul Milgrom; Bid, ask and transaction prices in a specialist market Journal of Financial Economics, , vol. Dealer Markets Models. Glosten and Milgrom () sequential model. Assume a market place with a quote-driven protocol. That is, with competitive market. Glosten, L.R. and Milgrom, P.R. () Bid, Ask and Transactions Prices in a Specialist Market with Heterogeneously Informed Traders. Journal.
|Published (Last):||25 November 2014|
|PDF File Size:||5.78 Mb|
|ePub File Size:||19.12 Mb|
|Price:||Free* [*Free Regsitration Required]|
Then, in Section I solve for the optimal trading strategy of the informed agent as a system of first order conditions and boundary constraints.
Theoretical Economics LettersVol. Let and denote the bid and ask prices at time.
Substituting in the formulas for and from above yields an expression for the price change that is purely in terms of the trading intensities and the price. Let denote the milfrom of prices. I interpolate the value function levels at and linearly. The Case of Dubai Financial Market. I now want to derive a set of first order conditions regarding the optimal decisions of high and low type informed agents as functions of these bid and ask prices which can be used to pin down the equilibrium vector of trading intensities.
Similar reasoning yields a symmetric condition for low type informed traders. Code the for the simulation can be found on my GitHub site. Below I outline the estimation procedure in complete detail. Relationships, Human Behaviour and Financial Transactions. Thus, in the equations below, I drop the time dependence wherever it causes no confusion.
The algorithm updates the value function in each step by first computing how badly the no trade indifference condition in Equation 15 is violated, and then lowering the values of for near when the high type informed trader is too eager to trade and raising them when he is too apathetic about trading and vice versa for the low type trader. In the definition above, the and subscripts denote the realized value and trade directions for the informed traders.
Notes: Glosten and Milgrom () – Research Notebook
Related Party Transactions and Financial Performance: In order to guarantee a solution to the optimization problem posed above, I restrict the domain of potential trading strategies to milgrrom that generate finite end of game wealth. Asset Pricing Framework There is a mklgrom risky asset which pays out at a random date. Let be the closest price level to such that and let be the closest price level to such that.
Numerical Solution In the results below, I set and for simplicity.
Notes: Glosten and Milgrom (1985)
I then plug in Equation 10 to compute and. Given thatwe can interpret as the probability of the event at time given the information set. I then look for probabilistic trading intensities which make the net position of the informed trader a martingale.
There is an informed trader and a stream of uninformed traders who arrive with Poisson intensity. This combination of conditions pins down the equilibrium. Application to Pricing Using Bid-Ask. If the high type informed traders want to sell at priceincrease their value function at price by. In fact, in markets with a higher information value, the effect of attention constraints on the liquidity provision ability of market makers is greater.
Between trade price drift. Empirical Evidence from Italian Listed Companies. Optimal Trading Strategies I now characterize the equilibrium trading intensities of the informed traders. Finally, I show how to numerically compute comparative statics for this model. It is not optimal for the informed traders to bluff.
I consider the behavior of an informed trader who trades a single risky asset with a market maker that is constrained by perfect competition. Compute using Equation 9. No arbitrage implies that for all with and since: So, for example, denotes the migrom intensity at some time in the buy direction of an informed trader who knows that the value of the asset is.
Let and denote the value functions of the high and low type informed traders respectively. I milbrom initial guesses at the values of and. Price of risky asset. There are forces at work here.