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Trading behavior, asset price, and market quality: Based on probabilistic attitude

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  • Sun, Jianchun
  • Zhang, Shunming

Abstract

We investigate the influence of probabilistic attitude, particularly the probabilistic optimism-pessimism, on trading behavior and market quality. The optimistic attitude leads traders to adventurously hold nonzero discontinuous investment positions, while the pessimistic attitude leads to limited participation. Probabilistic neutrality generates linear equilibrium with state-independent market quality. Optimistic and pessimistic markets exhibit nonlinear equilibria with contrasting features in price premiums, market depth, price impact, and reversed state-dependent traits in price skewness, price volatility, market liquidity, and price efficiency. Our results highlight a decisive role of probabilistic attitude in shaping markets.

Suggested Citation

  • Sun, Jianchun & Zhang, Shunming, 2025. "Trading behavior, asset price, and market quality: Based on probabilistic attitude," Journal of Financial Markets, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:finmar:v:76:y:2025:i:c:s1386418125000308
    DOI: 10.1016/j.finmar.2025.100990
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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