c) Start with the Glosten-Milgrom Model with the following parameters: 1 V = 60, V =...

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c) Start with the Glosten-Milgrom Model with the following parameters: 1 V = 60, V = 90, =- 3 = where V is the value of the stock, u is the proportion of informed traders in the market, and is the probability of the value of the stock being high. i) Draw the probability tree for this model. ii) Show that the unconditional probability of a sell order is given by: P(sell)= (1-7)+(1-)/2 iii) Derive the Bid Price, B. Demonstrate all your steps. iv) The Ask Price, A, is given by: (1+ V +(1-7)(1-)V A = (4 marks) (4 marks) (12 marks) 1+2- Explain what the Bid-Ask spread, S, is and calculate S after the first trade occurs. (4 marks) v) Now suppose that the proportion of informed trader in the market decreases. Demonstrate what happens to the spread for a given . Interpret your result. (6 marks) c) Start with the Glosten-Milgrom Model with the following parameters: 1 V = 60, V = 90, =- 3 = where V is the value of the stock, u is the proportion of informed traders in the market, and is the probability of the value of the stock being high. i) Draw the probability tree for this model. ii) Show that the unconditional probability of a sell order is given by: P(sell)= (1-7)+(1-)/2 iii) Derive the Bid Price, B. Demonstrate all your steps. iv) The Ask Price, A, is given by: (1+ V +(1-7)(1-)V A = (4 marks) (4 marks) (12 marks) 1+2- Explain what the Bid-Ask spread, S, is and calculate S after the first trade occurs. (4 marks) v) Now suppose that the proportion of informed trader in the market decreases. Demonstrate what happens to the spread for a given . Interpret your result. (6 marks)

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i Probability tree for the GlostenMilgrom Model H L Buy Sell Buy The probability tree shows two possible states of the stock value high H and low L Ea... View the full answer