Related papers: Limit Orders and Knightian Uncertainty
Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and establish their existence. In general, such equilibria lead to Pareto inefficiency and coincide with…
We introduce a novel equilibrium concept that incorporates Knightian uncertainty into the cursed equilibrium (Eyster and Rabin, 2005). This concept is then applied to a two-player game in which agents can engage in trade or refuse to do so.…
The aim of this short note is to establish a limit theorem for the optimal trading strategies in the setup of the utility maximization problem with proportional transaction costs. This limit theorem resolves the open question from [4]. The…
We run experimental asset markets to investigate the emergence of excess trading and the occurrence of synchronised trading activity leading to crashes in the artificial markets. The market environment favours early investment in the risky…
We study robust stochastic optimization problems in the quasi-sure setting in discrete-time. The strategies in the multi-period-case are restricted to those taking values in a discrete set. The optimization problems under consideration are…
In this paper, we study an irreversible investment problem under Knightian uncertainty. In a general framework, in which Knightian uncertainty is modeled through a set of multiple priors, we prove existence and uniqueness of the optimal…
This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both the drift and volatility of the driving process. At a technical level, the analysis requires a…
Prediction problems in finance go beyond estimating the unknown parameters of a model (e.g. of expected returns). This is because such a model would have to include parameters governing the market participants' propensity to change their…
Standard economic theory assumes that agents in markets behave rationally. However, the observation of extremely large fluctuations in the price of financial assets that are not correlated to changes in their fundamental value, as well as…
This paper investigates optimal portfolio strategies in a financial market where the drift of the stock returns is driven by an unobserved Gaussian mean reverting process. Information on this process is obtained from observing stock returns…
We consider singular control in inventory management under Knightian uncertainty, where decision makers have a smooth ambiguity preference over Gaussian-generated priors. We demonstrate that continuous-time smooth ambiguity is the…
In this article we consider a special case of an optimal consumption/optimal portfolio problem first studied by Constantinides and Magill and by Davis and Norman, in which an agent with constant relative risk aversion seeks to maximise…
This paper studies sequential information acquisition by an ambiguity-averse decision maker (DM), who decides how long to collect information before taking an irreversible action. The agent optimizes against the worst-case belief and…
Traders buy and sell financial instruments in hopes of making profit, and brokers are responsible for the transaction. There are several hypotheses and conspiracy theories arguing that in some situations, brokers want their traders to lose…
Nontransitive choices have long been an area of curiosity within economics. However, determining whether nontransitive choices represent an individual's preference is a difficult task since choice data is inherently stochastic. This paper…
We consider the economic problem of optimal consumption and investment with power utility. We study the optimal strategy as the relative risk aversion tends to infinity or to one. The convergence of the optimal consumption is obtained for…
This paper studies a multi-armed bandit problem where the decision-maker is loss averse, in particular she is risk averse in the domain of gains and risk loving in the domain of losses. The focus is on large horizons. Consequences of loss…
This paper formulates a model of utility for a continuous time framework that captures the decision-maker's concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are…
We consider the problem of utility maximization for small traders on incomplete financial markets. As opposed to most of the papers dealing with this subject, the investors' trading strategies we allow underly constraints described by…
Consider an investor trading dynamically to maximize expected utility from terminal wealth. Our aim is to study the dependence between her risk aversion and the distribution of the optimal terminal payoff. Economic intuition suggests that…