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Limit Orders and Knightian Uncertainty

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  • Michael Greinecker
  • Christoph Kuzmics

Abstract

A range of empirical puzzles in finance has been explained as a consequence of traders being averse to ambiguity. Ambiguity averse traders can behave in financial portfolio problems in ways that cannot be rationalized as maximizing subjective expected utility. However, this paper shows that when traders have access to limit orders, 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.

Suggested Citation

  • Michael Greinecker & Christoph Kuzmics, 2022. "Limit Orders and Knightian Uncertainty," Papers 2208.10804, arXiv.org.
    • Handle: RePEc:arx:papers:2208.10804
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    Cited by:

    1. Antoine Billot & Sujoy Mukerji & Jean-Marc Tallon, 2020. "Market Allocations under Ambiguity: A Survey," Revue économique, Presses de Sciences-Po, vol. 71(2), pages 267-282.

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