(c) Consider the sequential trading model of Glosten and Milgrom (1985). Let us assume that: - The future value of the asset, V, can take the value of 42 or 36 with equal probability. That is, =0.5. - Half the traders are informed and half are uninformed. That is =0.5. - Further, assume that the uninformed traders are equally likely to buy or sell. - The dealer earns zero expected profits, such that: atbt=E(VBt)=E(St) where at is the ask price, bt is the bid price, Bt indicates a buy order and St indicates a sell order all at time t. - Given Bayes' theorem: P(YZ)=P(ZY)P(Z)P(Y) solve for the bid price, ask price and bid-ask spread at time t. (d) Following from part (c), assume that the dealer receives a buy order at time t. Would the dealer's quotes increase or decrease from t to t+1 ? Would the bid-ask spread increase or decrease from t to t+1 ? Explain the economic intuition of these predictions. (c) Consider the sequential trading model of Glosten and Milgrom (1985). Let us assume that: - The future value of the asset, V, can take the value of 42 or 36 with equal probability. That is, =0.5. - Half the traders are informed and half are uninformed. That is =0.5. - Further, assume that the uninformed traders are equally likely to buy or sell. - The dealer earns zero expected profits, such that: atbt=E(VBt)=E(St) where at is the ask price, bt is the bid price, Bt indicates a buy order and St indicates a sell order all at time t. - Given Bayes' theorem: P(YZ)=P(ZY)P(Z)P(Y) solve for the bid price, ask price and bid-ask spread at time t. (d) Following from part (c), assume that the dealer receives a buy order at time t. Would the dealer's quotes increase or decrease from t to t+1 ? Would the bid-ask spread increase or decrease from t to t+1 ? Explain the economic intuition of these predictions