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Ambiguity-aversion in a Single Auction Market

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  • Paolo Vitale

    (University of Pescara)

Abstract

Within Kyle's single auction model, we show that an ambiguity-averse insider, who is uncertain about the market maker's beliefs, implements a robust trading strategy, so that she selects as her market order that which maximizes her expected profits against those beliefs which penalize her most. Her trading strategy is equivalent to that of a risk-averse insider who does not face any Knightian uncertain. As she finds it optimal to trade less aggressively and reveal her private information at a slower pace than her risk-neutral counterpart, ambiguity-aversion reduces market efficiency but improves market liquidity.

Suggested Citation

  • Paolo Vitale, 2017. "Ambiguity-aversion in a Single Auction Market," Economics Bulletin, AccessEcon, vol. 37(3), pages 1745-1752.
    • Handle: RePEc:ebl:ecbull:eb-17-00375
    as

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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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