Related papers: Limit Orders and Knightian Uncertainty
In a continuous-time setting where a risk-averse agent controls the drift of an output process driven by a Brownian motion, optimal contracts are linear in the terminal output; this result is well-known in a setting with moral hazard and…
We study the experimentation dynamics of a decision maker (DM) in a two-armed bandit setup (Bolton and Harris (1999)), where the agent holds ambiguous beliefs regarding the distribution of the return process of one arm and is certain about…
We study arbitrage opportunities, market viability and utility maximization in market models with an insider. Assuming that an economic agent possesses from the beginning an additional information in the form of a random variable G, which…
We argue that contemporary stock market designs are, due to traders' inability to fully express their preferences over the execution times of their orders, prone to latency arbitrage. In turn, we propose a new order type which allows…
In this paper, we study optimal switching problems under ambiguity. To characterize the optimal switching under ambiguity in the finite horizon, we use multidimensional reflected backward stochastic differential equations (multidimensional…
Representative investors whose behaviour is modelled by a deterministic finite automaton generate complexity both in the time series of each asset and in the cross-sectional correlation when the rule governing their behaviour is…
Financial markets are subject to long periods of polarized behavior, such as bull-market or bear-market phases, in which the vast majority of market participants seem to almost exclusively choose one action (between buying or selling) over…
In this paper I empirically investigate prediction markets for binary options. Advocates of prediction markets have suggested that asset prices are consistent estimators of the "true" probability of a state of the world being realized. I…
We study the problem of maximising terminal utility for an agent facing model uncertainty, in a frictionless discrete-time market with one safe asset and finitely many risky assets. We show that an optimal investment strategy exists if the…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
In financial markets, liquidity is not constant over time but exhibits strong seasonal patterns. In this article we consider a limit order book model that allows for time-dependent, deterministic depth and resilience of the book and…
This paper studies learning in markets with aggregate uncertainty about whether trade is efficient. A long-lived seller offers prices to buyers, who are short-lived and arrive according to a Poisson process. A hidden state determines…
An investor's risk aversion is assumed to tend to infinity. In a fairly general setting, we present conditions ensuring that the respective utility indifference prices of a given contingent claim converge to its super replication price.
How do supply and demand from informed traders drive market prices of bitcoin options? Deribit options tick-level data supports the limits-to-arbitrage hypothesis about the market maker's supply. The main demand-side effects are that…
Communication is rarely perfect, but rather prone to error of transmission and reception. Often the origin of these errors cannot be properly quantified and is thus imprecisely known. We analyze the impact of an ambiguous noise which may…
Gilboa and Schmeidler's (1989) uncertainty aversion plays a central role in decision theory and economics, yet many inconsistent behaviors have been observed in experiments. Motivated by this, we study an axiom postulating a minimal degree…
Ambiguity and ambiguity aversion have been widely studied in decision theory and economics both at a theoretical and an experimental level. After Ellsberg's seminal studies challenging subjective expected utility theory (SEUT), several…
This paper studies robust forward investment and consumption preferences and optimal strategies for a risk-averse and ambiguity-averse agent in an incomplete financial market with drift and volatility uncertainties. We focus on non-zero…
We consider the hedging problem where a futures position can be automatically liquidated by the exchange without notice. We derive a semi-closed form for an optimal hedging strategy with dual objectives - to minimise both the variance of…
When aggregating Subjective Expected Utility preferences, the Pareto principle leads to an impossibility result unless the individuals have a common belief. This paper examines the source of this impossibility in more detail by considering…