Microstructure and Ambiguity
Cornell University - Department of Economics
Cornell University - Samuel Curtis Johnson Graduate School of Management
January 20, 2010
Journal of Finance, Forthcoming
Johnson School Research Paper Series No. 01-2010
A goal for stock exchanges is to increase participation by firms and investors. We show how specific features of the microstructure can reduce perceived ambiguity, and induce participation by both investors and issuers. We develop a model with sophisticated traders, who we view as expected utility maximizers with rational expectations, and unsophisticated traders, who we view as rational traders facing ambiguity about the payoffs to participating in the market. We show how designing markets to reduce ambiguity can benefit investors through greater liquidity, exchanges through greater volume, and issuing firms through a lower cost of capital.
Number of Pages in PDF File: 54Accepted Paper Series
Date posted: January 21, 2010
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