(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 = 0.5. Half the traders are informed and half are uninformed. That is a = 0.5. Further, assume that the uninformed traders are equally likely to buy or sell. The dealer earns zero expected profits, such that: at = E(V|B) b = E(V|S) where at is the ask price, b, is the bid price, B indicates a buy order and S, indicates a sell order all at time t. Given Bayes' theorem: P(Y|Z) = P(Z|Y) P(Y) P(Z) solve for the bid price, ask price and bid-ask spread at time t. bt (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 = 0.5. Half the traders are informed and half are uninformed. That is a = 0.5. Further, assume that the uninformed traders are equally likely to buy or sell. The dealer earns zero expected profits, such that: at = E(V|B) b = E(V|S) where at is the ask price, b, is the bid price, B indicates a buy order and S, indicates a sell order all at time t. Given Bayes' theorem: P(Y|Z) = P(Z|Y) P(Y) P(Z) solve for the bid price, ask price and bid-ask spread at time t. bt