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Ambiguity aversion, funding liquidity, and liquidation dynamics

  • Oh, Ji Yeol Jimmy
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    This paper examines how ambiguity aversion and funding liquidity affect market dynamics when a large strategic trader is forced to liquidate. More specifically, the paper explores how ambiguity over an asset's value affects liquidation dynamics when ambiguity-averse traders follow maxmin utility. I also present the joint effects of ambiguity and limited funding liquidity on this liquidation process. The findings reveal that the presence of ambiguity leads to the emergence of a ‘no-trade region.’ This lack of trading activity under ambiguity becomes more prominent as the ambiguous support widens, and interestingly, as the initial wealth of the distressed strategic trader increases.

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    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 18 (2014)
    Issue (Month): C ()
    Pages: 49-76

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    Handle: RePEc:eee:finmar:v:18:y:2014:i:c:p:49-76
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