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Ambiguity and informativeness of (non-)trading

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  • Chu, Yinxiao

Abstract

We study a sequential trading mechanism with ambiguity-averse agents modeled by multiple prior preferences. Informed traders generally mix between trading and non-trading, and their trading probability decreases with ambiguity. If agents are sufficiently ambiguous, informed traders do not trade, and only noise traders place orders; trading becomes uninformative. When signal accuracy is ambiguous, trading can make public beliefs more ambiguous over time, which leads to social learning failures in the long run. Moreover, since informed traders may not trade, no-trade can also be informative when signal accuracy is asymmetric. Even with continuous action spaces, sufficiently high ambiguity stops social learning.

Suggested Citation

  • Chu, Yinxiao, 2024. "Ambiguity and informativeness of (non-)trading," Games and Economic Behavior, Elsevier, vol. 148(C), pages 367-384.
    • Handle: RePEc:eee:gamebe:v:148:y:2024:i:c:p:367-384
    DOI: 10.1016/j.geb.2024.10.001
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    More about this item

    Keywords

    Ambiguity aversion; Sequential trading; Adverse selection; Informational cascade;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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