medium · Market Microstructure adverse-selection
In the Kyle (1985) model, if the variance of noise trader order flow (σ_u^2) increases while the variance of the informed signal (Σ_0) remains constant, what happens to Kyle's Lambda (λ)?
- It remains constant as it only depends on the signal
- It decreases, indicating a more liquid market
- It becomes zero, eliminating all transaction costs
- It increases, indicating a less liquid market
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