2022/04/23 by Ibrahim Ekren, Ekren, Ibrahim, Brad Mostowski +3 · 1 citation
Economics, Econometrics and Finance · #60H30 #60J60 (Primary) 91B44 (Secondary) #Complex Systems and Time Series Analysis #FOS: Economics and business #FOS: Mathematics #Financial Markets and Investment Strategies #Pricing of Securities (q-fin.PR) #Probability (math.PR) #Stochastic processes and financial applications #Trading and Market Microstructure (q-fin.TR)
paper · pdf · doi:10.48550/arxiv.2204.11069
openalex publication_date 2022/04/23 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We construct an equilibrium for the continuous time Kyle's model with stochastic liquidity, a general distribution of the fundamental price, and correlated stock and volatility dynamics. For distributions with positive support, our equilibrium allows us to study the impact of the stochastic volatility of noise trading on the volatility of the asset. In particular, when the fundamental price is log-normally distributed, informed trading forces the log-return up to maturity to be Gaussian for any choice of noise-trading volatility even though the price process itself comes with stochastic volatility. Surprisingly, we find that in equilibrium both Kyle's Lambda and its inverse (the market depth) are submartingales.