Consider the sequential trading model of Glosten and Milgrom (1985). Let us assume that: The future value of the asset, 0, can take the value of 4 or 5 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: Q = E(VB) by = E(OS) where a, is the ask price, b, is the bid price, B, indicates a buy order and Sindicates a sell order all at time t. Given Bayes' theorem: P(Y) P(YZ) = P(ZIN P(Z) solve for the bid price, ask price and bid-ask spread at timet. [Type your response here] (10 marks) (b) 1 Now, assuming a sale at time t, solve for the bid price, ask price and bid-ask spread at time t + 1. (5 marks) [Type your response here) (c) How does price discovery occur within the equity market described by Glosten and Milgrom (1985)? Explain the link between price discovery and the bid-ask spread, as demonstrated by the Glosten and Milgrom (1985) model. (5 marks) Consider the sequential trading model of Glosten and Milgrom (1985). Let us assume that: The future value of the asset, 0, can take the value of 4 or 5 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: Q = E(VB) by = E(OS) where a, is the ask price, b, is the bid price, B, indicates a buy order and Sindicates a sell order all at time t. Given Bayes' theorem: P(Y) P(YZ) = P(ZIN P(Z) solve for the bid price, ask price and bid-ask spread at timet. [Type your response here] (10 marks) (b) 1 Now, assuming a sale at time t, solve for the bid price, ask price and bid-ask spread at time t + 1. (5 marks) [Type your response here) (c) How does price discovery occur within the equity market described by Glosten and Milgrom (1985)? Explain the link between price discovery and the bid-ask spread, as demonstrated by the Glosten and Milgrom (1985) model