Strategic Trading without Normality

Abstract

I present a model of strategic trading a la Kyle (1989) that does not require the assumption of normally distributed asset payoffs. I propose a constructive solution method: finding the equilibrium reduces to solving a linear ordinary differential equation. With non-normal payoffs, the price response becomes an asymmetric, non-linear function of order size: greater for buys than sells and concave (convex) for small sell (buy) orders when asset payoffs are positively skewed; concave for large sell (buy) orders when payoffs are bounded below (above). The model can speak to key empirical findings and provides new predictions concerning the shape of price impact.

BibTeX

@unpublished{Glebkin2016Strategic,
  author = {Glebkin, Sergei},
  title = {Strategic Trading without Normality},
  year = {2016},
  note = {Working paper},
  url = {https://sglebkin.com/STWN.pdf}
}