COWLES FOUNDATION FOR RESEARCH IN
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COWLES FOUNDATION DISCUSSION PAPER NO. 1535 CONTINUOUS VERSUS DISCRETE MARKET GAMES Alexandre Marino and Bernard De Meyer De Meyer and Moussa Saley [4] provide an endogenous justification for the appearance of Brownian Motion in Finance by modeling the strategic interaction between two asymmetrically informed market makers with a zero-sum repeated game with one-sided information. The crucial point of this justification is the appearance of the normal distribution in the asymptotic behavior of Vn(P)//n. In De Meyer and Moussa Saley’s model [4], agents can fix a price in a continuous space. In the real world however, the market compels the agents to post prices in a discrete set. The previous remark raises the following question: Does the normal density still appear in the asymptotic of Vn//n for the discrete market game? The main topic of this paper is to prove that for all discretization of the price set, Vn(P)//n converges uniformly to 0. Despite of this fact, we do not reject De Meyer, Moussa analysis: when the size of the discretization step is small as compared to n–1/2, the continuous market game is a good approximation of the discrete one. 1991 Mathematics Subject Classification: 91A20, 91B26 Key words: Insider trading, game of incomplete information, Brownian Motion Key words and phrases: JEL Classification: |
