Related papers: Limit Orders and Knightian Uncertainty
We investigate a continuous-time investment-consumption problem with model uncertainty in a general diffusion-based market with random model coefficients. We assume that a power utility investor is ambiguity-averse, with the preference to…
We introduce a model-free preference under ambiguity, as a primitive trait of behavior, which we apply once as well as repeatedly. Its single and double application yield simple, easily interpretable definitions of ambiguity aversion and…
We study a dynamic asset pricing problem in which a representative agent is ambiguous about the aggregate endowment growth rate and trades a risky stock, human capital, and a risk-free asset to maximize her preference value of consumption…
Subjective expected utility theory assumes that decision-makers possess unlimited computational resources to reason about their choices; however, virtually all decisions in everyday life are made under resource constraints - i.e.…
An investor with constant absolute risk aversion trades a risky asset with general It\^o-dynamics, in the presence of small proportional transaction costs. In this setting, we formally derive a leading-order optimal trading policy and the…
A speculative agent with Prospect Theory preference chooses the optimal time to purchase and then to sell an indivisible risky asset to maximize the expected utility of the round-trip profit net of transaction costs. The optimization…
We give explicit solutions for utility maximization of terminal wealth problem $u(X_T)$ in the presence of Knightian uncertainty in continuous time $[0,T]$ in a complete market. We assume there is uncertainty on both drift and volatility of…
In game theory and artificial intelligence, decision making models often involve maximizing expected utility, which does not respect ordinal invariance. In this paper, the author discusses the possibility of preserving ordinal invariance…
We consider statistical Markov Decision Processes where the decision maker is risk averse against model ambiguity. The latter is given by an unknown parameter which influences the transition law and the cost functions. Risk aversion is…
We formalize the paradox of an omniscient yet lazy investor - a perfectly informed agent who trades infrequently due to execution or computational frictions. Starting from a deterministic geometric construction, we derive a closed-form…
Applications of machine learning inform human decision makers in a broad range of tasks. The resulting problem is usually formulated in terms of a single decision maker. We argue that it should rather be described as a two-player learning…
In problems involving the allocation of a single non-disposable commodity, we study rules defined on a general domain of preferences requiring only that each preference exhibit a unique global maximum. Our focus is on rules that satisfy a…
Kuhn's Theorem shows that extensive games with perfect recall can equivalently be analyzed using mixed or behavioral strategies, as long as players are expected utility maximizers. This note constructs an example that illustrate the limits…
We consider trading against a hedge fund or large trader that must liquidate a large position in a risky asset if the market price of the asset crosses a certain threshold. Liquidation occurs in a disorderly manner and negatively impacts…
We study an intertemporal consumption and portfolio choice problem under Knightian uncertainty in which agent's preferences exhibit local intertemporal substitution. We also allow for market frictions in the sense that the pricing…
An empirical analysis, suggested by optimal Merton dynamics, reveals some unexpected features of asset volumes. These features are connected to traders' belief and risk aversion. This paper proposes a trading strategy model in the optimal…
We deal with the optimal execution problem when the broker's goal is to reach a performance barrier avoiding a downside barrier. The performance is provided by the wealth accumulated by trading in the market, the shares detained by the…
We consider classical Merton problem of terminal wealth maximization in finite horizon. We assume that the drift of the stock is following Ornstein-Uhlenbeck process and the volatility of it is following GARCH(1) process. In particular,…
In this article we model chaotic dynamics in financial markets by treating the market price, and market makers' inventory, as anharmonic oscillators with a nonlinear coupling. The market makers' risk appetite being the key parameter that…
We consider risk averse investors with different levels of anxiety about asset price drawdowns. The latter is defined as the distance of the current price away from its best performance since inception. These drawdowns can increase either…