Market power, ambiguity, and market participation

Zhigang Qiu, Yanyi Wang and Shunming Zhang

Journal of Financial Markets, 2023, vol. 62, issue C

Abstract: We investigate how market power or price impact of market makers affects the participation decisions of investors with ambiguity aversion. Limited participation exists because some investors are ambiguous about the asset fundamental, but the market power of market makers mitigates limited participation. As a result, when market makers become less competitive, the non-participation range decreases, while return volatility increases; thus, market makers and ambiguity-averse investors are better off, but investors with liquidity needs are worse off. However, the non-participation range and uninformed investors’ welfare can increase or decrease when information is more asymmetric, depending on the importance of liquidity demand.

Keywords: Price impact; Imperfect competition; Limited participation; Nash equilibrium; Ambiguity aversion (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:62:y:2023:i:c:s1386418122000520

DOI: 10.1016/j.finmar.2022.100761

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