Related papers: Limit Orders and Knightian Uncertainty
We give a detailed characterization of optimal trades under budget constraints in a prediction market with a cost-function-based automated market maker. We study how the budget constraints of individual traders affect their ability to…
Most work in mechanism design assumes that buyers are risk neutral; some considers risk aversion arising due to a non-linear utility for money. Yet behavioral studies have established that real agents exhibit risk attitudes which cannot be…
This paper examines an optimal investment problem in a continuous-time (essentially) complete financial market with a finite horizon. We deal with an investor who behaves consistently with principles of Cumulative Prospect Theory, and whose…
We study a problem of finding an optimal stopping strategy to liquidate an asset with unknown drift. Taking a Bayesian approach, we model the initial beliefs of an individual about the drift parameter by allowing an arbitrary probability…
Proponents of behavioral finance have identified several "puzzles" in the market that are inconsistent with rational finance theory. One such puzzle is the "excess volatility puzzle". Changes in equity prices are too large given changes in…
This paper investigates the problem of finding a preference relation on a set of acts from the knowledge of an ordering on events (subsets of states of the world) describing the decision-maker (DM)s uncertainty and an ordering of…
In the present article we use the quantum formalism to describe the effects of risk and ambiguity in decision theory. The main idea is that the probabilities in the classic theory of expected utility are estimated probabilities, and thus do…
Equity premium, the surplus returns of stocks over bonds, has been an enduring puzzle. While numerous prior works approach the problem assuming the utility of money is invariant across contexts, our approach implies that in efficient…
We suggest that one individual holds multiple degrees of belief about an outcome, given the evidence. We then investigate the implications of such noisy probabilities for a buyer and a seller of binary options and find the odds agreed upon…
We consider an agent who needs to buy (or sell) a relatively small amount of asset over some fixed short time interval. We work at the highest frequency meaning that we wish to find the optimal tactic to execute our quantity using limit…
In this paper, we study a non-linear filtering problem in the presence of signal model uncertainty. The model ambiguity is characterized by a class of probability measures from which the true one is taken. After interchanging the order of…
The information investors acquire in asset markets has various forms. We refer to range information as information about the upper and lower bound which the payoff of an asset may reach in the future. This paper explores the market impacts…
We study the problem of optimal trading using general alpha predictors with linear costs and temporary impact. We do this within the framework of stochastic optimization with finite horizon using both limit and market orders. Consistently…
Human decision-making in real-life deviates significantly from the optimal decisions made by fully rational agents, primarily due to computational limitations or psychological biases. While existing studies in behavioral finance have…
According to conventional wisdom, ambiguity accelerates optimal timing by decreasing the value of waiting in comparison with the unambiguous benchmark case. We study this mechanism in a multidimensional setting and show that in a…
People are often reluctant to sell a house, or shares of stock, below the price at which they originally bought it. While this is generally not consistent with rational utility maximization, it does reflect two strong empirical regularities…
I study the limit of a large random economy, where a set of consumers invests in financial instruments engineered by banks, in order to optimize their future consumption. This exercise shows that, even in the ideal case of perfect…
We discuss the objectives of automation equipped with non-trivial decision making, or creating artificial intelligence, in the financial markets and provide a possible alternative. Intelligence might be an unintended consequence of…
We study a discrete-time financial market with a single constrained trader, competitive market makers, and noise traders. Within the class of linear equilibria, the equilibrium structure is shown to be uniquely determined by two state…
We consider a Bayesian financial market with one bond and one stock where the aim is to maximize the expected power utility from terminal wealth. The solution of this problem is known, however there are some conjectures in the literature…