Is Kyle's equilibrium model stable?
Umut Cetin, Kasper Larsen
TL;DR
This paper analyzes the stability of Kyle's equilibrium model in a dynamic trading setting, showing stability for up to two trading times and instability for three or more, regardless of parameters.
Contribution
It provides a rigorous proof of the stability conditions of Kyle's model across different numbers of trading periods, extending understanding of its dynamic properties.
Findings
Stable for one or two trading times
Unstable for three or more trading times
Stability independent of input parameters
Abstract
In the dynamic discrete-time trading setting of Kyle (1985), we prove that Kyle's equilibrium model is stable when there are one or two trading times. For three or more trading times, we prove that Kyle's equilibrium is not stable. These theoretical results are proven to hold irrespectively of all Kyle's input parameters.
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Taxonomy
TopicsEconomic theories and models · Game Theory and Applications · Auction Theory and Applications