hard · Volume Profile Analysis
In a Kyle model context, if the variance of fundamental value ( σ_v ) increases while the variance of noise trading ( σ_u ) remains constant, what happens to Kyle's Lambda ( λ ) and the behavior of the informed trader?
- λ decreases (lower price impact); the informed trader increases their trade size.
- λ increases (higher price impact); the informed trader reduces their trade size.
- λ stays constant; the informed trader is unaffected by fundamental variance.
- The informed trader abandons the market as λ becomes infinite.
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