A Dynamic Market Microstructure Model with Insider Information and Order Book

42 Pages Posted: 4 Mar 2005 Last revised: 18 Jun 2017

See all articles by Joerg Osterrieder

Joerg Osterrieder

University of Twente; Bern Business School

Date Written: February 1, 2005

Abstract

This paper studies a dynamic market microstructure model in which a strategic market maker competes with an informed trader. We include the presence of noise traders and limit order traders in our setup. Our model is a N-period model. We give necessary and sufficient conditions for an equilibrium to exist and provide conditions for it to be unique. Moreover, both the informed trader and the market maker try to maximize their profits. The resulting recursive equations lead to various economic interpretations. We investigate the interplay of different information sets. Each agent learns about the information of the other agent through their respective actions in the financial market. Finally we compare this competitive situation for the market maker as in Kyle (1985).

Keywords: market microstructure, insider trading, limit order traders, multiperiod

JEL Classification: D40, D49, D50

Suggested Citation

Osterrieder, Joerg, A Dynamic Market Microstructure Model with Insider Information and Order Book (February 1, 2005). Available at SSRN: https://ssrn.com/abstract=676028 or http://dx.doi.org/10.2139/ssrn.676028

Joerg Osterrieder (Contact Author)

University of Twente ( email )

Drienerlolaan 5
Departement of High-Tech Business and Entrepreneur
Enschede, 7522 NB
Netherlands

Bern Business School ( email )

Brückengasse
Institute of Applied Data Sciences and Finance
Bern, BE 3005
Switzerland

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