Bid and Ask Prices Tailored to Traders’ Risk-Aversion and Gain-Propension
20 Pages Posted: 9 Jun 2011
Date Written: May 17, 2011
Bid and ask prices tailored to the traders’ risk-aversion and gain-propension are defined. Risk and gain premia are given by the Extended Gini indices, where the characteristic parameter captures the traders’ perception of the under-performance and over-performance of the asset. Sufficient and necessary conditions for successful trading are set out. The bid-ask price spread and the so-called probability of trading are used to measure the chances of trading. Numerical tables for these measures are given for the most common distributions and different levels of buyer’s risk-aversion and seller’s gain-propension.
Keywords: Extended Gini Index, bid and ask prices, pessimism and optimism index
JEL Classification: G10, G11, G12, G29
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