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Difficulty: Hard
Category: Market Microstructure
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Topics: market-microstructure, liquidity, informed-trading, kyle's-lambda
Kyle's Lambda ( $ \lambda $ ) is a measure of market illiquidity, quantifying the price impact of order flow. Specifically, it represents the expected change in price for a given order imbalance. Assume a market where price changes are linearly related to order flow imbalance. A high value of $ \lambda $ indicates a less liquid market. What does a high $ \lambda $ generally imply about the ratio of informed traders to noise traders in that market?
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