IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v65y2010i5p1817-1846.html
   My bibliography  Save this article

Microstructure and Ambiguity

Author

Listed:
  • DAVID EASLEY
  • MAUREEN O'HARA

Abstract

A goal for stock exchanges is to increase participation by firms and investors. We show how specific features of the microstructure can reduce perceived ambiguity, and induce participation by both investors and issuers. We develop a model with sophisticated traders, who we view as expected utility maximizers with rational expectations, and unsophisticated traders, who we view as rational traders facing ambiguity about the payoffs to participating in the market. We show how designing markets to reduce ambiguity can benefit investors through greater liquidity, exchanges through greater volume, and issuing firms through a lower cost of capital. Copyright (c) 2010 the American Finance Association.

Suggested Citation

  • David Easley & Maureen O'Hara, 2010. "Microstructure and Ambiguity," Journal of Finance, American Finance Association, vol. 65(5), pages 1817-1846, October.
  • Handle: RePEc:bla:jfinan:v:65:y:2010:i:5:p:1817-1846
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2010.01595.x
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jang, Bong-Gyu & Lee, Seungkyu & Lim, Byung Hwa, 2016. "Robust consumption and portfolio rules with time-varying model confidence," Finance Research Letters, Elsevier, vol. 18(C), pages 342-352.
    2. Massimo Guidolin & Francesca Rinaldi, 2009. "A simple model of trading and pricing risky assets under ambiguity: any lessons for policy-makers?," Working Papers 2009-020, Federal Reserve Bank of St. Louis.
    3. Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
    4. Marco Nieddu & Lorenzo Pandolfi, 2018. "Cutting Through the Fog: Financial Literacy and the Subjective Value of Financial Assets," CSEF Working Papers 497, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    5. Agarwal, Vikas & Arisoy, Y. Eser & Naik, Narayan Y., 2017. "Volatility of aggregate volatility and hedge fund returns," Journal of Financial Economics, Elsevier, vol. 125(3), pages 491-510.
    6. Fourel, V. & Idier, J., 2011. "Risk aversion and Uncertainty in European Sovereign Bond Markets," Working papers 349, Banque de France.
    7. Pritsker, Matthew, 2013. "Knightian uncertainty and interbank lending," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 85-105.
    8. Massimo Guidolin & Francesca Rinaldi, 2010. "A simple model of trading and pricing risky assets under ambiguity: any lessons for policy-makers?," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 105-135.
    9. Huang, Helen Hui & Zhang, Shunming & Zhu, Wei, 2017. "Limited participation under ambiguity of correlation," Journal of Financial Markets, Elsevier, vol. 32(C), pages 97-143.
    10. David Hirshleifer & Chong Huang & Siew Hong Teoh, 2017. "Model Uncertainty, Ambiguity Aversion, and Market Participation," NBER Working Papers 24143, National Bureau of Economic Research, Inc.
    11. repec:taf:oaefxx:v:3:y:2015:i:1:p:1024022 is not listed on IDEAS
    12. O’Hara, Maureen, 2015. "High frequency market microstructure," Journal of Financial Economics, Elsevier, vol. 116(2), pages 257-270.
    13. Joyce Hsieh & Chien-Chung Nieh, 2010. "An overview of Asian equity markets," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 24(2), pages 19-51, November.
    14. Kalaitzoglou, Iordanis Angelos & Ibrahim, Boulis Maher, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 89-102.
    15. Amira, Khaled & Muzere, Mark L., 2011. "Competition among stock exchanges for equity," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2355-2373, September.
    16. Easley, David & Hendershott, Terrence & Ramadorai, Tarun, 2014. "Leveling the trading field," Journal of Financial Markets, Elsevier, vol. 17(C), pages 65-93.
    17. Ravi Kashyap, 2016. "Hong Kong - Shanghai Connect / Hong Kong - Beijing Disconnect (?), Scaling the Great Wall of Chinese Securities Trading Costs," Papers 1603.01341, arXiv.org, revised Jun 2016.
    18. Iordanis Angelos Kalaitzoglou & Boulis Maher Ibrahim, 2015. "Liquidity and resolution of uncertainty in the European carbon futures market," Post-Print hal-01107956, HAL.
    19. Chakrabarty, Bidisha & Moulton, Pamela C., 2012. "Earnings announcements and attention constraints: The role of market design," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 612-634.
    20. Guy Maugis, Pierre-André, 2017. "Paradigm shifts," Economics Discussion Papers 2017-92, Kiel Institute for the World Economy (IfW).
    21. Ravi Kashyap, 2016. "A Tale of Two Consequences: Intended and Unintended Outcomes of the Japan TOPIX Tick Size Changes," Papers 1602.00839, arXiv.org, revised May 2016.
    22. Fairley, Kim & Weitzel, Utz, 2017. "Ambiguity and risk measures in the lab and students’ real-life borrowing behavior," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 67(C), pages 85-98.
    23. Zhong, Zhuo, 2016. "Reducing opacity in over-the-counter markets," Journal of Financial Markets, Elsevier, vol. 27(C), pages 1-27.
    24. Jorgensen, Bjorn & Li, Jing & Sadka, Gil, 2012. "Earnings dispersion and aggregate stock returns," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 1-20.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:65:y:2010:i:5:p:1817-1846. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/afaaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.