Ambiguous price formation

Aliyev, N; He, X-Z

Ambiguous price formation

Aliyev, N

He, X-Z

Permalink

Publisher:: Elsevier
Publication Type:: Journal Article
Citation:: Journal of Mathematical Economics, 2023, 106, pp. 102842
Issue Date:: 2023-05

Closed Access

	Filename	Description	Size
	10.1016 j.jmateco.2023.102842.pdf	Published version	989.22 kB	Adobe PDF	View/Open

Copyright Clearance Process

Recently Added
In Progress
Closed Access

This item is closed access and not available.

Full metadata record

Field	Value	Language
dc.contributor.author	Aliyev, N https://orcid.org/0000-0001-9637-2957
dc.contributor.author	He, X-Z
dc.date.accessioned	2023-04-18T01:20:05Z
dc.date.available	2023-04-18T01:20:05Z
dc.date.issued	2023-05
dc.identifier.citation	Journal of Mathematical Economics, 2023, 106, pp. 102842
dc.identifier.issn	0304-4068
dc.identifier.uri	http://hdl.handle.net/10453/169874
dc.description.abstract	This paper investigates the impact of informational ambiguity and attitude to it on security prices. Attention is focused on equilibria in which a market maker has an ambiguity in his probability assessment. We show that the equilibrium ambiguous bid-ask spread can be decomposed into the probabilistic spread and an “ambiguity premium/discount” component characterizing the ambiguity aversion/seeking of the market maker. In particular, for a sufficiently ambiguity averse market maker, the bid-ask spread widens with the informational ambiguity of the market maker, which provides an explanation to drying liquidity and price inefficiency during financial turmoils. An extension to different trade sizes shows that informed traders are more likely to trade large orders when there is a major ambiguous shock to the economy.
dc.language	en
dc.publisher	Elsevier
dc.relation	http://purl.org/au-research/grants/arc/DP130103210
dc.relation.ispartof	Journal of Mathematical Economics
dc.relation.isbasedon	10.1016/j.jmateco.2023.102842
dc.rights	info:eu-repo/semantics/closedAccess
dc.subject	14 Economics
dc.subject.classification	Economic Theory
dc.title	Ambiguous price formation
dc.type	Journal Article
utslib.citation.volume	106
utslib.for	14 Economics
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	closed_access	*
dc.date.updated	2023-04-18T01:20:03Z
pubs.publication-status	Accepted
pubs.volume	106

Abstract:

This paper investigates the impact of informational ambiguity and attitude to it on security prices. Attention is focused on equilibria in which a market maker has an ambiguity in his probability assessment. We show that the equilibrium ambiguous bid-ask spread can be decomposed into the probabilistic spread and an “ambiguity premium/discount” component characterizing the ambiguity aversion/seeking of the market maker. In particular, for a sufficiently ambiguity averse market maker, the bid-ask spread widens with the informational ambiguity of the market maker, which provides an explanation to drying liquidity and price inefficiency during financial turmoils. An extension to different trade sizes shows that informed traders are more likely to trade large orders when there is a major ambiguous shock to the economy.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/169874