## Abstract

We analyze a static Kyle (Continuous auctions and insider trading. Princeton University, Princeton, 1983) model in which a risk-neutral informed trader can use arbitrary (linear or non-linear) deterministic strategies, and a finite number of market makers can use arbitrary pricing rules. We establish a strong sense in which the linear Kyle equilibrium is robust: the first variation in any agent’s expected payoff with respect to a small variation in his conjecture about the strategies of others vanishes at equilibrium. Thus, small errors in a market maker’s beliefs about the informed speculator’s trading strategy do not reduce his expected payoffs. Therefore, the original equilibrium strategies remain optimal and still constitute an equilibrium (neglecting the higher-order terms). We also establish that if a non-linear equilibrium exists, then it is not robust.

Original language | English (US) |
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Pages (from-to) | 297-318 |

Number of pages | 22 |

Journal | Annals of Finance |

Volume | 11 |

Issue number | 3-4 |

DOIs | |

State | Published - Nov 1 2015 |

## Keywords

- Bayesian Nash equilibrium
- Information
- Informed speculation
- Market microstructure
- Robustness
- Uniqueness

## ASJC Scopus subject areas

- Finance
- Economics, Econometrics and Finance(all)