Arrow-Debreu Meets Kyle: Price Discovery Across Derivatives
General Economics
2026-03-23 v42 Economics
Abstract
We study price discovery in a model where an informed agent has arbitrary private information about state probabilities and trades state-contingent claims. The model unifies the key elements of Arrow-Debreu (1954) and Kyle (1985). When the claims are options, the informed agent has arbitrary information about the underlying asset's payoff distribution and trades option portfolios. Our setting provides the first equilibrium framework that encompasses longs-tanding option-market practices and regularities, including common trading strategies and the volatility smile across strikes.
Keywords
Cite
@article{arxiv.2302.13426,
title = {Arrow-Debreu Meets Kyle: Price Discovery Across Derivatives},
author = {Christian Keller and Michael C. Tseng},
journal= {arXiv preprint arXiv:2302.13426},
year = {2026}
}