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Market power, ambiguity, and market participation

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  • Qiu, Zhigang
  • Wang, Yanyi
  • Zhang, Shunming

Abstract

We investigate how market power or price impact of market makers affects the participation decisions of investors with ambiguity aversion. Limited participation exists because some investors are ambiguous about the asset fundamental, but the market power of market makers mitigates limited participation. As a result, when market makers become less competitive, the non-participation range decreases, while return volatility increases; thus, market makers and ambiguity-averse investors are better off, but investors with liquidity needs are worse off. However, the non-participation range and uninformed investors’ welfare can increase or decrease when information is more asymmetric, depending on the importance of liquidity demand.

Suggested Citation

  • Qiu, Zhigang & Wang, Yanyi & Zhang, Shunming, 2023. "Market power, ambiguity, and market participation," Journal of Financial Markets, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:finmar:v:62:y:2023:i:c:s1386418122000520
    DOI: 10.1016/j.finmar.2022.100761
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    More about this item

    Keywords

    Price impact; Imperfect competition; Limited participation; Nash equilibrium; Ambiguity aversion;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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