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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
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 12 or 10. The asset takes the value of 12 with probability 0.5. That is, 0 = 0.5. Fourty percent of traders are informed. That is a = 0.4. 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|St) where at is the ask price, be is the bid price, B indicates a buy order and St indicates a sell order all at time t. Solve for the instantaneous bid-ask spread at time t. 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 12 or 10. The asset takes the value of 12 with probability 0.5. That is, 0 = 0.5. Fourty percent of traders are informed. That is a = 0.4. 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|St) where at is the ask price, be is the bid price, B indicates a buy order and St indicates a sell order all at time t. Solve for the instantaneous bid-ask spread at time t
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