Robust trading for ambiguity-averse insiders

Paolo Vitale

Journal of Banking & Finance, 2018, vol. 90, issue C, 113-130

Abstract: In an asset market with explicit trading rules we characterize the trading activity of an ambiguity-averse insider who faces Knightian uncertain over other market participants’ beliefs and implements a robust trading strategy. Such insider employs a max-min choice mechanism, so that in any round of trading she selects as her market order that which maximizes her expected profits against those market beliefs which penalize her most. Her trading strategy is equivalent to that of a risk-averse insider who does not face any Knightian uncertain and possesses risk-sensitive recursive preferences. As she finds it optimal to trade more aggressively and reveal her private information at a faster pace than her risk-neutral (expected-profit maximizer) counterpart, we find that ambiguity-aversion is beneficial to the efficiency of the market.

Keywords: Insider trading; Market efficiency; Robust trading; Ambiguity-aversion; Risk-aversion (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426618300645
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:90:y:2018:i:c:p:113-130

DOI: 10.1016/j.jbankfin.2018.03.007

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().