Limit Orders and Knightian Uncertainty

25 Pages Posted: 7 Apr 2020 Last revised: 1 Jun 2020

See all articles by Michael Greinecker

Michael Greinecker

affiliation not provided to SSRN

Christoph Kuzmics

University of Graz - Department of Economics

Date Written: May 11, 2020

Abstract

Ambiguity averse decision-makers can behave in financial portfolio problems in ways that cannot be rationalized as subjective expected utility maximization. Indeed, [Dow and da Costa Werlang, Econometrica 1992] show that an ambiguity-averse decision-maker might abstain from trading an asset for a wide interval of prices; something no subjective expected utility maximizer can. Dow and da Costa Werlang assume that decision-makers know the price of an asset when trading. We show that when markets operate via limit orders instead, 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: Knightian uncertainty, ambiguity aversion, subjective expected utility, financial market participation, strict dominance

JEL Classification: D81, G11, C72

Suggested Citation

Greinecker, Michael and Kuzmics, Christoph, Limit Orders and Knightian Uncertainty (May 11, 2020). Available at SSRN: https://ssrn.com/abstract=3555828 or http://dx.doi.org/10.2139/ssrn.3555828

Michael Greinecker

affiliation not provided to SSRN

Christoph Kuzmics (Contact Author)

University of Graz - Department of Economics ( email )

Universitaetsstrasse 15
RESOWI - F4
Graz, 8010
Austria

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