Robust Trading for Ambiguity-Averse Insiders

Paolo Vitale

G. d'Annunzio University - Dipartimento di Economia

December 31, 2016

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.

Number of Pages in PDF File: 38

Keywords: Insider Trading, Market Efficiency, Robust Trading, Ambiguity-Aversion, Risk-Aversion

JEL Classification: D82, G14

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Date posted: January 10, 2017  

Suggested Citation

Vitale, Paolo, Robust Trading for Ambiguity-Averse Insiders (December 31, 2016). Available at SSRN: https://ssrn.com/abstract=2895376 or http://dx.doi.org/10.2139/ssrn.2895376

Contact Information

Paolo Vitale (Contact Author)
G. d'Annunzio University - Dipartimento di Economia ( email )
I-65127 Pescara, Pescara
+39 085 453 7647 (Phone)
+39 085 453 7565 (Fax)
HOME PAGE: http://www.unich.it/~vitale/
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