Limit Orders and Knightian Uncertainty
Theoretical Economics
2022-08-24 v1
Abstract
A range of empirical puzzles in finance has been explained as a consequence of traders being averse to ambiguity. Ambiguity averse traders can behave in financial portfolio problems in ways that cannot be rationalized as maximizing subjective expected utility. However, this paper shows that when traders have access to limit orders, all investment behavior of an ambiguity-averse decision-maker is observationally equivalent to the behavior of a subjective expected utility maximizer with the same risk preferences; ambiguity aversion has no additional explanatory power.
Keywords
Cite
@article{arxiv.2208.10804,
title = {Limit Orders and Knightian Uncertainty},
author = {Michael Greinecker and Christoph Kuzmics},
journal= {arXiv preprint arXiv:2208.10804},
year = {2022}
}
Comments
JEL Classification: D81, G11, C72; keywords: Knightian uncertainty, ambiguity aversion, subjective expected utility, asset pricing puzzles, strict dominance