Uniqueness and Existence of Linear Equilibrium with a Constrained Trader
By: Heeyoung Kwon, Jin Hyuk Choi
Potential Business Impact:
Helps predict how stock prices will change.
We study a discrete-time financial market with a single constrained trader, competitive market makers, and noise traders. Within the class of linear equilibria, the equilibrium structure is shown to be uniquely determined by two state variables: the market maker's expectation of the trader's remaining demand and the residual demand beyond this expectation. This discrete-time uniqueness result aligns with its continuous-time analogue, indicating that the latter may emerge as the unique limit within the same class. We also prove the existence of a linear equilibrium, providing formal support to numerical and empirical findings in related work.
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