Robustness of equilibrium in the Kyle model of informed speculation

Alex Boulatov, Dan Bernhardt

Research output: Contribution to journalArticlepeer-review


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 languageEnglish (US)
Pages (from-to)297-318
Number of pages22
JournalAnnals of Finance
Issue number3-4
StatePublished - Nov 1 2015


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

ASJC Scopus subject areas

  • General Economics, Econometrics and Finance
  • Finance


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